Monti's Honeymoon is over

posted by Geoff Andrews at Sunday, December 04, 2011

Sunday 4 December

The almost universal sigh of relief – ‘celebration’ is not the right word – felt by Italy’s European allies at the departure of Silvio Berlusconi and his replacement with Mario Monti as Italian Prime Minister has now passed. Monti’s honeymoon is over and he has now set out his first reforms to tackle the real economic problems. This estimated 24 billion euro programme has to address not only rising debt, but ways of stimulating growth in what remains a very difficult moment. Following the cabinet meeting on Sunday, he has announced some radical-sounding plans, including cuts in the privileges of Italy’s regional politicians, stepping up a commitment to deal with tax evasion, new taxes on capital transactions and property, (and some luxury goods) and major pension reform. More radical measures, notably labour reform, bigger income tax hikes and VAT rises will follow.

The cabinet announcement was delivered in a quite different sombre language in contrast to the showmanship of recent years, and this might explain some widespread early optimism. He has caught some of the mood of the early ‘post-Berlusconi’ era. He sounds much more like a statesman than Berlusconi, who constantly praised the virtues of a salesman, and the contrast between a populist and a technocrat could not be stronger. There is a feeling of a new beginning, with some tough times ahead. A TV address to fellow Italians on Sunday evening has even been compared to one of Churchill’s war-time wireless broadcasts to the nation at its greatest time of need. One cabinet minister even broke down when explaining the need for sacrifice to make pension reforms work. Monti himself is clearly very keen to avoid Italy being seen as responsible for further crisis in the Eurozone. The urgency is clear.

He also seems to have picked up some clever moves from Giorgio Napolitano, President of the Republic, who has played a pivotal role in this transition period. Monti has refused to take a salary either as PM or Economy Minister (he holds both positions), while he has made his intentions clear by getting stuck into the vast privileges of the country’s politicians. The extraordinary privileges of Italy’s political class have been held up as the worst possible example to the nation and, of course, it was the failure of this elite to carry through structural and democratic reforms which contributed so much to the current predicament.

It won’t be this easy though. Italy has had many false dawns in recent years. We should remember the circumstances which brought Monti to power; a combination of nimble footwork by Giorgio Napolitano, and external pressure from European allies. The official opposition had nothing to do with Berlusconi’s resignation, and the latter does not believe he made mistakes or deserves his current plight. On the other hand Berlusconi has managed to remove himself from making unpopular decisions, while indicating he will pull the plug if Monti’s reforms do not appeal. He still retains a parliamentary majority and remains a populist threat.

In moving ahead with his priorities to reform pensions, to raise taxes, cut public sector salaries and to persuade companies to re-invest capital, he has stressed the need for a long-term strategy for more transparency and structural reform – something Italy desperately needs. Yet, as the reforms take effect, the political ramifications of these changes will gradually become apparent. Along the way, there will be unpopular measures, conflicts with a range of politicians, social movement activists and union leaders, social tensions and much uncertainty.

Monti has critics on the right, with the Northern League leader Umberto Bossi, already making clear his opposition to taxes, pension reforms and the power of the EU. He also faces hostility from the left, notably in the trade unions, who are sure to oppose labour reforms which have been postponed for a later stage. Wages, jobs and pension reform will still be an issue for the CGIL, Italy’s largest union confederation. The occupy movement will also step up its campaign. There is an acute sense of alienation amongst a lost generation of young people in Italy, which in the short-term at least is set to increase. Monti knows he will find it difficult to carry some of these measures, despite an intense series of meetings and assurances. He has pledged to put his faith in Europe if he cannot agree a strong enough austerity package at home. This warning from an unelected technocrat to put more faith in the EU (and IMF) will hardly increase confidence at home if things get tense.

Monti has made stirring pledges and appeals in the preparation of today’s announcement, asking people to make sacrifices for the common good of the nation. He also seems to have been politically astute in avoiding some of the worst scenarios for those on the right as well as the left, though this may lead some to suggest that it will only later that we get the ‘full Monti’ of higher taxes (including VAT) and labour reforms. He knows all eyes are on Italy, and the way the country reacts over the next couple days in the run up to the next Euro summit will be vital.