Analysis: Italy's Monti loses his shine

Reuters News
Posted: Apr 16, 2012 2:53 AM
Analysis: Italy's Monti loses his shine

By Gavin Jones

ROME (Reuters) - When Mario Monti became Italian prime minister last November it seemed he could do no wrong. Borrowing costs fell and praise poured in from commentators, international bodies and political leaders on both sides of the Atlantic.

Now the former economics professor faces falling approval ratings, criticism of his reforms, rising bond yields and a feeling he may not be able to revolutionize Italy after all.

Monti says his reforms of pensions, the service sector and the labor market lay the foundations for Italy to emerge from its record as one of the world's most sluggish economies.

But he is increasingly isolated in that view and Italy, along with Spain, is again at the heart of fears that the euro zone debt crisis could worsen.

Two of Italy's most prominent economists last week dismissed Monti's most recent reforms, of the service sector and the jobs market, as missed opportunities that would not help growth.

Alberto Alesina of Harvard and Francesco Giavazzi of Milan's Bocconi University said in a joint article in Corriere della Sera daily that a major overhaul of public spending was now "the only card left to play" to improve Italy's economic outlook.

Such criticism from academia would have been unimaginable a few months ago, yet Monti is having to defend his record as he comes under fire from business, the media and economists.

Monti still has many supporters, but their enthusiasm has declined. His reforms are increasingly judged as no more than modest steps in the right direction.

That would be fine for a normal government with a five-year term, but it is starting to be viewed as too little for an unelected, technocrat administration that was expected to turn the country around in a year.

Last week Monti accused the Wall Street Journal of "snap judgments" after the newspaper criticized his "cave-in" over labor reform in an editorial titled "Surrender, Italian Style".

He had watered down his original reform proposal to ensure the backing of leftist supporters in parliament, scrapping a plan to allow firms to fire workers for business reasons without any risk of having to re-instate them.

The change infuriated Italy's main business lobby, Confindustria, whose president Emma Marcegaglia called the revised text "very bad" and said it would do nothing to help firms or jobs. She later said Confindustria would not try to hijack the reform out of "a great sense of responsibility".

Investors have also signaled they are worried. The gap between Italian benchmark bond yields and safer German Bunds fell to 2.8 percentage points in March from around 5.5 points just before Monti took office.

Last week it was back up to 3.9 points, although this was partly due to concerns about Spain.


To some extent, Monti is suffering from the unrealistic expectations generated by his first weeks in power. Markets and commentators were wooed by his economic competence and decisive action on public finances, while the scandals of his predecessor Silvio Berlusconi made him an ideal act to follow.

They were happy to overlook that as an unelected technocrat, with broad backing in parliament but no party of his own, lawmakers' support was likely to wane as soon as the risk of a Greek-style debt crisis receded.

Monti has increasingly had to come to terms with political parties and lobbies, slowing his policy drive since he rushed through a 30 billion euro austerity plan last year that included pension reform.

That reform abolished early-retirement pensions based on the number of years worked and sharply raised the retirement age for women. It is seen as Monti's most important achievement by far.

By contrast his subsequent "Grow-Italy" package to deregulate the service sector and his more recent reform of labor rules were both the product of lengthy negotiations with parties and pressure groups. They have drawn more skepticism than plaudits.

"Apart from pensions, on all the other fronts, from liberalizations to the labor market, everything has remained substantially unchanged," said Fabio Scacciavillani, chief economist of the Oman Investment Fund and formerly at Goldman Sachs and the European Central Bank.

After months of silence his predecessor as economy minister, Giulio Tremonti, attacked Monti last week, saying he was choking the economy with "a cascade of taxes". Despite being in Monti's majority in parliament, the centre-right Tremonti scorned his "absent" privatizations and insignificant de-regulation steps.

On the other side of the political divide, the far-left accuses Monti of being an agent for the ECB.

The central bank sent Berlusconi a letter last summer demanding swift reforms in return for buying Italian bonds on the market. But aside from pensions, Monti is still making very modest progress in fulfilling the ECB's wish list.

It wanted the budget deficit to be cut to 1 percent of output this year "mainly by spending cuts". Monti has a goal of 1.6 percent and two thirds of his fiscal consolidation has come from tax hikes which have deepened economic recession.

The ECB also called for "the full liberalization of local public services," through "large scale privatizations", a reform of collective wage bargaining to tailor wages to firms' specific needs and a "major overhaul of the public administration to improve business friendliness" - none of which Monti has begun.


A common complaint is the gulf between his rhetoric and actions. Critics say he convincingly explains the need for reform only for the measures to be less sweeping than anticipated.

Before watering down his labor reform, he said he was no longer willing to negotiate with unions and threatened to step down if the country was not "ready".

"The question is not whether the country is ready, because it has already shown that it is, the question is whether the government is ready, because so far its reforms have not lived up to expectations," said Alberto Mingardi, head of the free-market Bruno Leoni think-tank.

His service sector deregulation package aimed to cut costs and boost competition, but its many critics said it made only marginal changes and avoided key problem areas, such as public utilities and banks.

The government said its liberalization drive had only just begun and it would present more steps every month. None have been announced since the first package was unveiled in January.

The labor reform aims to address the "duality" of the system, by reducing the gap between well-protected older workers in permanent jobs and a growing army of workers on temporary contracts with no rights or benefits.

Labor experts have applauded Monti's goal but most said the reform, which only affects the private sector, would have a limited impact.

Monti has not given equal job protection to all workers or scrapped temporary contracts, as urged by some economists, though he raised tax on firms hiring temporary staff.

"He should have got rid of these contracts because now the risk is that firms will pass on the higher costs of using them to workers by cutting their wages," said Giorgio Navaretti, economics professor at Milan University.

And while Monti made it easier on paper for firms to fire workers for business reasons he also increased the discretionary powers of judges to decide whether those ruled to have been wrongly dismissed should get compensation or their jobs back.

Monti says the reforms are complex but will lay the foundation for increased productivity, growth and employment.

Yet analysts say the complexity is part of the problem. They say that while one merit of the pension reform was its simplicity, the labor reform is complicated, hard to interpret and its results are impossible to predict.

"This reform will increase the time used up with legal disputes over dismissals and increase the uncertainty for companies," said Tito Boeri, economics professor at the same Bocconi University where Monti was rector.

(Editing by Anna Willard)