Italy’s new technocratic government won a confidence vote today in the lower house, a prelude to passage of an austerity program coveted by EU leaders. However, those same leaders are dismayed that the austerity package largely consists of tax increases rather than the “labor market reform” they favored.
In addition to austerity measures, heavily indebted countries like Italy and Greece are expected to carry out structural reforms that experts say may eventually make their economies competitive with those in northern Europe, particularly Germany’s. That lack of competitiveness has produced a chronic balance of payments deficit in the southern countries that economists say lies at the heart of the euro zone’s troubles.
It was hoped that Italian lawmakers would rally around Mr. Monti’s government of technocrats and make the tough decisions they have avoided in the past. But if his experience with this week’s measures is any guide, his government is bound to hit strong headwinds from vested interests that grip every corner of Italy’s complex, neofeudal economy.
After days of political wrangling in Parliament, the Monti government bowed to pressure from the right — most notably from the party of the former prime minister, Silvio Berlusconi — and dropped some elements of the $40 billion package of spending cuts and revenue increases, including a wealth tax and the speedy liberalization of closed professions like taxi drivers and pharmacists, a plan that drew protests from their powerful guilds. It also scaled back a newly reinstated property tax on primary residences.
After protests from the left and labor unions, some counting more pensioners than workers among their members, Mr. Monti reinstated inflation increases on low-level pensions that he said would make the measures more equitable.
Well, this is such a disappointment for the EU. Because Monti appears to have lost his nerve and committed the cardinal sin of listening to his constituencies, the people who would be affected the most by the changes in policy, rather than bloodlessly instituting significant pain across all sectors. I’m not an expert in Italian labor market policy, though I know enough to know that there’s quite a bit of patronage involved. But the larger point is this: Monti could not govern without the consent of the governed. I don’t think that’s something to despair about at all.
Maybe the government is corrupted by a bunch of special interests protecting their privileges, and that has led to the sclerotic pace of growth in Italy. At the same time, the goal of the technocrats is to run a budget surplus in the middle of a recession and call it “reform.” I don’t get the sense that they have any better take on the needs for Italy than the allegedly corrupted Parliament. If you want a program of reforms to work, you should do what every country since time immemorial has done – go to the people and get their approval. Installing “technocratic” governments to subvert the popular will is not the answer.
Of course, it could be that Monti’s solution represents the worst of all possible worlds: Italy still gets the austerity, but a middling form of it, without breaking some legitimate constraints on their economy. At the same time, there’s an easy solution to the balance of payments deficit at the heart of this crisis in Europe; you allow each country to either set their own monetary policy, or you add transfer policies from the countries with a surplus to the countries with the deficit. In other words, you either break up the euro, or you create a United States of Europe. The deals thus far have done neither. And even labor market reforms won’t do the trick. I don’t think Germany plans to make themselves poorer through competition with Italy.