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Thursday, June 14, 2012

Italy’s Five Star movement isn’t funny for Monti

We've got a piece in City AM today, looking at the potential spillover from Spain to Italy, particularly in light of the increasingly worrying political situation there. By all accounts it seems that technocratic Italian Prime Minister Mario Monti has slightly lost touch with domestic issues in search of a grand eurozone solution.

See below for the full piece:
SPAIN’S €100bn bailout plan has failed to reassure markets. The permanent fear of contagion means nervous glances are once again being directed at Italy. Austria’s Finance Minister Maria Fekter was the first political leader to claim that Italy may have to tap into the Eurozone’s rescue funds – a statement which did not go down well in Rome.

Since entering office last November, Italy’s Prime Minister Mario Monti, and his cabinet of technocrats, have done more to reform the country’s stagnating economy than almost any previous government over the last few decades.

However, Monti has recently become more concerned with convincing Germany and others to go ahead with grand plans for a political union in the Eurozone – Eurobonds and a banking union – than completing crucial domestic reforms. Worryingly, the pace of reform has slowed down, even though there are no shortage of items on the Italian government’s to-do list – including plans to increase labour market flexibility in the public sector, a comprehensive anti-corruption bill and, ideally, a new electoral law to be adopted ahead of the next general elections in 2013.

There’s a lesson here: the loss of momentum in Italy’s reform programme perfectly summarises why, beyond the pro-integration rhetoric, Germany remains so wary of a political union in which Berlin joins liabilities with Athens, Madrid or Rome – from Eurobonds to a single bank resolution fund. From the government to the media, Germans are simply too concerned that Club Med countries would see risk-pooling in the Eurozone as an excuse to delay the necessary reforms and give in to the temptation to fund growth via more debt – which is what put them in the current mess.

But there’s another reason why Monti should focus more of his attention on the home front. Recent polls show that support for the Italian Prime Minister is at its lowest since he took office, and the political parties that back him in parliament are also struggling. Voters have had their heads turned by a rather unlikely alternative – the so-called Five Star movement, led by the comedian Beppe Grillo.

A political maverick, Grillo has mainly been campaigning for a clean-up of Italian politics. But he has also suggested that Italy should consider dropping the euro while still remaining a member of the EU, and write off at least part of its gigantic public debt. Despite having very little cash to fund its campaign, the Five Star movement did incredibly well in the latest mayoral elections, and is polling at 20 per cent – leading Silvio Berlusconi’s People of Freedom party by several percentage points.

Instead of planning new grand European projects, Monti should re-focus his attention on the domestic reform programme. This is not the time to have your head in the EU clouds. As the rise of Beppe the comedian illustrates, public support for the euro in Italy can no longer be taken for granted.


Rollo said...

Why should anyone in Italy want to keep themselves in the Euro? It is Euro membership that has driven them into the mess.

Rollo said...

Why should anyone in Italy want to keep themselves in the Euro? It is Euro membership that has driven them into the mess.

Rik said...

The problem for Monti is imho that he is probably the only PM in the EZ who has a proper oversight of the whole picture.
The staff both the EUs as well as that of the most important countries are making one miss after another. They donot oversee the financial implications of things and even on the legal front they make one mistake after another. So the EZs leaders are as well not able to rely on their advisors.

Seeing the above it is probably a good idea to have Monti involved more on a European level.

At home. I basically donot think it has become so bad enough that the populus finally will realise that there are very difficult times ahead. There is simply not enough political support to get the necessary measures through.
In Italy they will now start to hit the population and as I see it these first have to get used to austerity, before the country will be ready for the measures that are really necessary (and as a consequence real austerity).

Get realistic look at the measures uptil now they are in no way enough to compensate for a 20-30% uncompetitiveness gap. And this for a country Italy that had marginal growth and if corrected for overborrowing simply negative growth for the last decade (use a simple multiplier).

Monti should pay attention at what happens at home, but his (effectively anybody else's as well, if we would see another PM in Italy) margins look to me very small.

Rik said...

The Euro is not the only problem Italy has, they have a lot of them:
-inefficient, expensive and corrupt government and apparatus;
-too much red tape;
-too high taxes;
-education and language problem (for that level of GDP per capita);
-part of a potential Zombie continent;
-too high wages;
-too high prices;
-too high sovereign debt;
-bad tax collection.
Simply big time uncompetitive.

Rollo said...

All this is true. Which is why they cannot survive in the Euro. Do you think Monti will make them efficient? young? honest? tax-paying?

Ken Worthy said...

Italy cannot survive in the Euro, and neither can anyone else in the long run. All the bailouts so far fail to do anything about promoting growth. They cannot do anything about growth because they cannot address the fundamental problem of competitiveness. Italy and Spain are never going to be competitive with Germany in a single currency. The only solution is for the Euro to break up. That's why EU leaders cannot talk about competitiveness. The markets will force them to eventually, but they can keep their precious project going for a long time yet, because they care more about the Euro than they do about their own people.