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Italy after the summer break: Monti’s last round?

Intensely scrutinised by other euro zone members, in a context of economic turmoil and growing public discontent, Mario Monti's government has a lot on its plate for the next months.

Pietro Battistella
20 August 2012
So, what's next Mr Monti? - Demotix/Giuseppe Lami. All Rights Reserved.

So, what's next Mr Monti? - Demotix/Giuseppe Lami. All Rights Reserved.

The Italian technocratic government is entering its last phase. In about six months, political elections will be held. Mario Monti, 69, the sober economy professor and former EU Commissioner who last November took over Silvio Berlusconi as Prime Minister amidst financial turmoil, has his last chance to clean out the Italian house and set up an agenda for the country after the 2013 elections. While Monti repeatedly stated that he won’t be running, the main political parties seem quite far from having the vision and the dependability needed to lead the country out of this deep economic crisis. In the last months, the strana maggioranza backing Monti in Parliament –  the centre-right Popolo della Libertà (PDL), the centre-left Partito Democratico (PD), and other parties from a third, ‘centrist’ group – has been progressively losing trust from the citizens and has failed thus far in renewing its ruling class.

'Agenda Monti' is an expression often used to indicate a certain path - a set of reforms, from public spending cuts to liberalization, innovation in public administration and flexibility in market labour - but also an attitude, a political language and a 'methodology' for Italy. Many politicians from the main parties state they will stick to this agenda – claiming to be Monti's spiritual successors - but few believe this, as it is uncertain that they will have the necessary political capital to do it.

Another austerity plan?

in the first days of August, Mario Monti won a confidence vote over a 26-billion-euro and three-year-long austerity package, just before the Italian Parliament went on summer recess, hoping that a market crisis wouldn't ruin this year's sunny Italian summer.

The package included a ten percent cut in public officials, up to twenty percent for senior public servants; a 1.5-billion-euro cut to ministerial budgets in both 2013 and 2014, up to 1.6 billion euros in 2015; a long-awaited reduction of the number of provincial governments (which are to be halved); cuts for regional and local government for thirteen billion euros in three years; cuts to the national health fund of 900 million euros in 2012, 1.8 billion euros in 2013, and 2 billion euros in 2014.

The main purpose of the package is said to be the postponement of the value added tax (VAT) increase. Currently set at ten and twenty-one percent, a VAT increase to twelve and 23 percent was originally planned for October 2012, but it is now postponed to July 2013. The bill, however, won’t be the last attempt to find a solution for Italy’s troubled public finance. Recession is hitting hard, with a decline of 2.5 percent yearly in the second quarter, making it more difficult for Italy to achieve a balanced budget by 2013, as initially scheduled, and regain full trust from the markets.

That’s why Monti’s spending cuts are not over yet: the long-debated public funds for political parties, as well as those for trade unions, seem to be the object of a new package likely to be presented in September. Further cuts to local governments (about ten billion euro) are to be taken into account, along with the savings from reducing tax breaks for businesses.

Memorandum of understanding

As most of the media put it, Mario Monti - backed by the Spanish Premier Mariano Rajoy and the French President Francois Hollande - gained a victory over Angela Merkel during the last European Council (28-29 June). After late-night negotiations led by the Italian professor, German Chancellor Angela Merkel accepted easier access to the permanent euro-zone bailout fund, the European Stability Mechanism (ESM). Yet, one month later, it is now clear that that night’s victory has to be reconsidered: euro zone countries will still need to sign a ‘memorandum of understanding’ - it is unclear how much this will differ from that signed by Athens - in order to get access to EU financial relief.

While Monti wanted this mechanism to be automatic - that is, not requiring any formal request from receiver countries - Angela Merkel, who is not exempt from domestic political tensions, has made clear that this would be too much of an incentive for troubled southern economies to ask for EU help instead of passing reforms. Last June in Brussels, Merkel lost the battle but not the war. Another Mario, the governor of the European Central Bank (ECB) Mario Draghi, confirmed this in early August when he repeated that the ECB's bond-buying policies will be enabled only on formal request by countries in need.

Therefore, debate has begun in Italy over the signing of a memorandum of understanding for receiving EU aid - essentially, a partial loss of national sovereignty. Less than a year ago, a letter from the ECB was leaked: it requested the Italian Government, back then led by Silvio Berlusconi, to make sweeping changes to its labour laws and take tough action to cut the deficit. The letter immediately caused a general outcry within Italian politics, whose pride had been suddenly and temporarily rekindled. 

Though many believe Italy should ‘make it by itself’, meaning Italy should refrain from asking for help from the EU, representatives of the Monti government insist that signing a memorandum of understanding inspires more fear than it ought to. 'It would simply mean meeting commitments already made', recently said Antonio Catricalà, a former Antitrust chief and now the Under Secretary of Cabinet, 'it would be a merely declarative act, with no new obligations. We are not and do not intend to become the EU's subjects'.

A new enemy: public debt 

For the first time in Italian history, European issues will be at the centre of the electoral campaign. Elections are to be held at the latest by spring 2013. It’s from this perspective that the parties' hesitation to endorse a request for EU aid, which would mean signing a memorandum, should be analysed. Follow-ups to the ‘going it alone’ attitude that has arisen among Italian parties are vast proposals aiming to tackle the number one suspect for the worsening of the Italian crisis: public debt.

Italy has a huge public debt that has reached 1,960 billion euros, 123.4 percent of GDP, making it the largest debt in relation to GDP in Europe, second only to Greece. Reducing the public debt has become the new issue of Italian politics. Many different proposals are being submitted to Monti’s government and are likely to be discussed, selected and hopefully concretised over the next months. Some measures have been taken in the last austerity package: some state-owned financial institutions, such as Sace, Fintecna and Simest, will be sold to the state-controlled holding company Cassa Depositi e Prestiti, a financial manoeuvre attempting to reduce public debt by about 10 billion euro.

Vittorio Grilli, the recently named Treasury Minister, is working on a plan to reduce debt by twenty percent in five years by selling public assets. Experts from academia and political parties are drafting more drastic proposals: some of them, like the one proposed by the PDL, aim to reduce the debt immediately by twenty percent (400 billion euros) by creating a private fund to manage and value public assets; others like the one coming from former Prime Minister Giuliano Amato intend to reduce it by 178 billion euros in five years by using different tools. The common rule is the desire to get as soon as possible under the psychological threshold of 100 percent of debt to GDP. After all, the Fiscal Compact ratified by Italy requires us to bring public debt to a maximum level of 60 percent on GDP in twenty years.

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