Saving Italy

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Saving Italy

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Can Mario Monti do it?

Berlusconi: a man visibly bored by economics and whose newspaper, il Giornale, described Angela Merkel’s Germany as “The Fourth Reich”

It is a strange but compelling political, economic and even moral drama. Strange, because the main protagonists are not conventional politicians: they are a professor, a hairy comedian and a joke-telling billionaire. Compelling, because the country is Italy, the eurozone’s third-largest economy which staggers under the burden of the world’s third-largest public debt. A drama, because how the story develops will determine the fate of the euro, and thus of whether the world stumbles towards recovery or collapses into a new Great Depression.

When did the story begin? For most people it was last November, when a sharp rise in Italy’s borrowing costs, a shambolic four-month-long process of budget-cutting that never happened, and the desertion of parliamentary supporters, all led to the resignation as prime minister of Silvio Berlusconi, the joke-telling, playboy billionaire who had led Italy’s government for eight of the previous ten years. The respected, even revered, president of the Republic, Giorgio Napolitano, appointed in his place an internationally renowned professor and former European Commissioner, Mario Monti, at the head of what Italians call a “technical government,” consisting mainly of fellow professors.

Outside Italy, Professor Monti’s seemingly sudden ascent from his old, quiet job presiding over a private business university in Milan, Bocconi, smelt undemocratic. This was especially so as in Greece a former central bank governor, Lucas Papademos, had been installed as prime minister at a similar moment. Professor Monti was rushed into parliament as a life senator, an appointment in Napolitano’s gift, which would be like the Queen appointing Howard Davies a life peer in order to make the former head of the London School of Economics Britain’s prime minister.

Few Italians thought it was undemocratic, however: the square outside the president’s grand residence in Rome, the Quirinale, a former home of Popes, was filled with crowds chiefly of young people celebrating Berlusconi’s fall; a YouTube image that went viral was film of an impromptu orchestra and choir singing Handel’s Hallelujah chorus.

It was a wonderfully appropriate image: the Hallelujahs to say goodbye and good riddance to a government drenched in scandal that had made Italy a laughing stock in international affairs (Angela Merkel, the chancellor of Germany and Nicolas Sarkozy, then president of France, had even smirked humiliatingly about Berlusconi at a joint press conference at an EU summit a few months earlier); and Hallelujahs to celebrate the arrival of a new Messiah, Mario Monti, to come and save Italy from its sins.

Yet the story did not begin last November, when the world first started paying full attention to Italy. It began 20 years ago, when Italy suffered a financial and political crisis from which it has yet to recover: the lira crashed out of the then European Exchange-Rate Mechanism under the weight of, as now, sovereign debts totalling 120 per cent of national output, and the old political establishment crashed out of politics under the weight of the Mani Pulite, or “Clean Hands,” corruption scandal, which destroyed the two parties that had been running Italy for half a century, the Christian Democrats and the Socialists.

The response in 1992 was, guess what, a technical government—actually two, or, on some political definitions, three of them. First there was Giuliano Amato, a wily professorial politician; then Carlo Azeglio Ciampi, governor of the Bank of Italy; and finally, in an ambiguously “technical” administration, Lamberto Dini, a former diplomat. All sought, as the heads of what in other countries and circumstances might be called “governments of national unity,” to introduce a quick set of reforms in the hope of resetting Italy’s course.

That is why Italians do not consider the Monti administration in any way anti-democratic. They have seen this before, and they feel comfortable that it is all perfectly constitutional, is subject to parliamentary votes of confidence, and will be followed quite soon by democratic elections. But what they also know is that 20 years ago it didn’t work. Since then Italy has stagnated, corruption has got worse, the rule of law has been undermined, and the debt is again 120 per cent of the nation’s output. So their questions are different: why should it work now? And what new politics and politicians will arrive to fill the current vacuum, as Silvio Berlusconi did when the media mogul swept into politics in 1994?

That is Mario Monti’s question too. He knows that Italy needs a revolution, the drastic period of transformation in justice, politics, the economy, education and more that it needed 20 years ago but didn’t get. Yet he must also know three other things: that as it stands, his spell in office will be for a maximum of 16 months before elections must be held by April 2013 and that revolutions elsewhere, by Margaret Thatcher and others, took 5-10 years at least; that revolutions are typically led by charismatic, tough individuals, and that although he may be tough he is certainly not charismatic; and that as his austerity measures and a deepening recession lose him the popularity that he initially had as the Messiah, politicians are scheming to take his place.

Chief among them are two whose style and ideas are anathema to this cautious, pro-European, devoutly Catholic professor: Beppe Grillo and Silvio Berlusconi. Grillo is, like Monti, an outsider, an anti-politician, but that is where the resemblance ends. This comedian turned political activist, who sports an impressive mop of curly grey hair, is a showman whose insurgent Five Star Movement is scaring mainstream political parties by winning mayoral elections and running at 20 per cent in national opinion polls. Most important from Monti’s point of view is the fact that apart from wishing a plague on all established political houses, Grillo’s most prominent and coherent policy is Italy’s exit from the euro.

The world already knows quite enough about Berlusconi, the man whose bond-market-enforced resignation enabled Monti to “save” the country, and who is not officially a comedian but a media billionaire whose jokes and burlesquery have led many to make the mistake of underestimating him during his 18 years in politics. Some were even fooled into believing his post-resignation statement that he planned to leave frontline politics, which has since proved to be one of his funnier jokes.

Much less funny is his search for the populist, vote-winning formula that he thinks could vault him back to where he believes he rightly belongs—Palazzo Chigi, the prime minister’s office, or at least in a role as the country’s political kingmaker. For it is Messrs Grillo and Berlusconi to whom Monti has been referring when he has recently warned other European Union leaders, and especially Angela Merkel, of the danger that an anti-euro and anti-German political mood may be rising in his country. This would rise even more rapidly if Germany fails to show solidarity. Grillo and Berlusconi are politically and culturally anathema to one another, but together they represent somewhere between 35 per cent and 45 per cent of Italian voters.

They could never form an alliance. But what they have in common is two powerful and dangerous things: a huge talent for political campaigning by talking the language of ordinary citizens; and scepticism about membership of the euro. Berlusconi, whose right-wing party, People of Liberty, is meant to be supporting Monti’s government in parliament, has only flirted with running against the euro, so far saying simply that talk of returning to the lira “should not be considered blasphemy.” But his family’s main newspaper, the aggressive and conservative il Giornale, in early August devoted its front page to an attack on Merkel, describing her Germany as “The Fourth Reich.”

For Prime Minister Monti, the man in power, this anti-euro agitation is both a danger and an asset. It is a danger, because he is trying to set a new course for Italy which combines fiscal austerity and liberalisation of markets, and so demands sacrifices even as the country’s recession is forcing unemployment higher (it is nearing 11 per cent of the workforce) and household incomes lower. The last thing he needs is for such delicate work to be undermined by political rabble-rousing, especially from a party that is supposed to be supporting him.

Nevertheless it is also an asset in his dealings with Germany and other eurozone creditor countries. If you don’t back me and my virtuous fiscal policies by helping to reduce my government’s borrowing costs, he can say, then look what political forces you might get in my place. It is all very well seeing Syriza and Golden Dawn rising in a small country like Greece. Imagine the consequences if Italian politics slide out of control: it will be like a massive avalanche hitting the euro.

It is a tricky balance to strike for a man who has never run for an elected office, who has no political party or organisation, and whose time in office is, as previously noted, severely limited. Monti has said he has no intention of running for election, and anyway his standing in opinion polls has fallen as his government of “saviours” has seemed to bring all pain and no gain.

Yet speculation abounds about a political life for Monti beyond the general election. The main rumour is that he will seek to replace Giorgio Napolitano, the man who manoeuvred him into the prime ministership, as president of the Republic when Napolitano’s term expires next May. That post, which is largely ceremonial but does come with some leverage, as Napolitano has shown, is elected by the two houses of parliament.

The other rumours swirl around the likelihood of Monti breaking his pledge not to remain prime minister after the next elections. He could seek to do that either by standing formally as the prime ministerial candidate at the head of a coalition of parties (though, being a life senator, he would not actually have to win a parliamentary seat), or by accepting an invitation to do so—feigning reluctance—after the elections, if the winning coalition were to ask him.

Few doubt that if an opportunity to stay on were to present itself, Monti would take it. Partly, that may represent a delusion of empathy: politicians and political commentators naturally assume that everyone else must be like them. But Monti is not like them: he is more conscious of responsibility than power, and so would not seek to stay in Palazzo Chigi regardless of the cost. Nevertheless, my suspicion is that he would stay.

The reason is that the odds are so high and the task he is presently facing so difficult. Italy really could crash out of the euro—just as it did from the precursor exchange-rate mechanism along with Britain in 1992—if its politics were to turn sourly anti-German and if markets were to conclude that its economy stood little chance of reform and growth.

Someone who has served two terms as a European Commissioner (1995 to 2004) and who fully understands the economic risks involved is not going to stand back and let that happen—if he can do anything about it. But he is painfully aware that his technical government cannot, for lack of time, be the true instrument of Italy’s change. He needs somehow to lay the ground for a much longer-term transformation.

When he took over from the flamboyant, macho, scandal-ridden Silvio Berlusconi, most observers commented on the personal contrasts between the two men: Italy was switching from a man visibly bored by economics to one who has dedicated his life to it; from a two-times divorcé keen on “bunga bunga” parties with teenage girls to a quiet monogamist; from an Italian who can barely decipher an English menu in a hamburger joint to an arch-internationalist fluent in English and capable too in French and German.

Now, however, it is the political contrasts that matter most: of political style, yes, but also of political diaries. Berlusconi governed through dramatic announcements and public rallies, despite actually being a do-nothing prime minister; Monti believes that slow and steady should win the race. But also Berlusconi’s most often-visited foreign leaders were Russia’s Vladimir Putin and Libya’s Colonel Muammar Gaddafi. Monti’s is Pope Benedict XVI: in barely ten months in office he has had seven audiences with the Pope.

No doubt that reflects his Catholic faith—religious piety was not readily associated with Berlusconi—as well as a desire to ensure that Italy’s largest, richest and most extensive public, religious and even commercial organisation, the Catholic Church, is at least not too unhappy with what he is doing. Yet it is tempting also to draw a further conclusion: that the role Monti would like to play in Italy in the longer term, in order to secure the economic and political transformation that he favours, is one rather like the Pope’s, albeit in secular form—as a quiet but stern guide, behind the scenes, though occasionally emerging onto a balcony.

To do that would require both stamina and toughness. There is no doubt that Monti has the latter quality. When he was European Commissioner for competition policy in 1999-2004 he showed it in spades, taking on multinational giants including Microsoft and General Electric. The Economist, of which at the time I was editor-in-chief, named him “Super Mario,” after the video-game character, and wrote that American business considered him “the corporate equivalent of Saddam Hussein,” a remark that Monti quoted smilingly in his defence in one of his early parliamentary speeches last year after Italians had accused their new prime minister of being too cosy with global companies and institutions such as the Davos World Economic Forum and the Trilateral Commission.

What Monti is definitely not is either charismatic or outspoken. He is actually a witty man, with quite a droll sense of humour. But that sort of humour does not come across very effectively in public communications, and he speaks too slowly and methodically to really do well in our soundbite age.

Moreover, like most professors he has something of a tin ear for public sentiment. When a fresh match-fixing scandal emerged in Italy’s Serie A, the top football league, as well as rightly condemning the malfeasance on moral grounds he immediately suggested that the league should be suspended for two to three years. A politician who is cutting the public’s bread through his austere fiscal policies was thus proposing to take away the most popular circus too. It did not go down well.

I have seen at first hand how he deals with cameras and media interviews. I have been making a documentary film about his country, called Girlfriend in a Coma. For the film, I interviewed Monti in Palazzo Chigi last December, and I asked this unlikely-seeming revolutionary leader who was his role model. I offered him some examples to trigger his thinking: Mikhail Gorbachev? Margaret Thatcher? Nelson Mandela?

Monti looked embarrassed to be asked the question. He tilted his head to one side and thought about it, silently. Eventually he began by saying his model should not be a foreigner but rather an Italian.

The Italian he chose was a revealing one, though not a name that would have been familiar to international audiences for the film. It was Luigi Einaudi: a man, he said, who worked with quiet determination, in the service of the public and to help his country emerge from very difficult times. Those times were the fall of Mussolini and defeat in the second world war.

Einaudi was, like Monti, a distinguished economist, unusually fond by Italian standards of liberal ideas, who had also worked as a journalist, for the big mainstream daily, Corriere della Sera and, as it happens, for the Economist. During Mussolini’s fascist reign, he had had to give up the Corriere but continued to contribute, anonymously of course, to the Economist. That finally ceased when he was made post-war Italy’s first governor of the Bank of Italy and then, in 1948, became the country’s second president of the Republic, a post he held until 1955.

That parallel, with an economist who became president, is one reason why the choice was interesting, but far from the most important one. That is the fact that Einaudi, in both of his two post-war roles, can be credited with having been one of the small number of post-fascist political leaders who created the conditions for Italy’s economic miracle. It seems impossible now, but in the two decades or so until the oil shock of the early 1970s, Italy was Europe’s fastest-growing economy. In fact, it ranked third in the world in terms of annual average growth in national output, behind only Japan and South Korea.

The growth resulted from many things, especially political stability and the freer international trade made possible by the General Agreement on Tariffs and Trade in 1948 and the establishment of European Economic Community by the Treaty of  Rome in 1957. Italy’s outperformance of its European neighbours also had something to do with its relative state of under-development: it had plenty of catching up to do. But two other factors were crucial: stable monetary and fiscal policy, which set an attractive environment for business investment; and a wave of internal liberalisation, dismantling many (but far from all) elements of the corporatist state of Mussolini. The country’s macroeconomic stability and liberal microeconomic policies owed a great deal to Einaudi.

Monti’s choice of Einaudi as his Italian role model can therefore be interpreted both as a tribute to his personal style, as an unassuming, hard-working public servant, and to his economic philosophy. It is that philosophy, in Italy’s very different circumstances today, which Mr Monti would dearly like to put into practice: as a liberal Pope, following Adam Smith rather than the gospels.

He is attempting to do so in a very Einaudian style: steadily, with determination, often with little fanfare. Monetary stability is, of course, now in the hands of his compatriot Mario Draghi, president of the European Central Bank, although it is also a creature of eurozone politics. So Monti has been a much more extensive traveller than his predecessor. As a result, however, he has fallen rapidly out of favour in Berlin, as his main effort to try to achieve monetary stability has been to try to cajole the Germans into accepting the mutualisation of eurozone debt. Chancellor Merkel has not found this amusing, even from a man fond of describing himself as “the most German of Italian economists.”

Fiscal policy is, however, in his hands, and there he has taken stern charge, cutting spending, raising taxes, regalvanising the campaign against tax evasion, and bringing forward to 2014 the Berlusconi government’s previous target of achieving budget balance. He must be disappointed, therefore, that financial markets have not been more impressed by his efforts: although Italy is the only one among the troubled debtor countries of the eurozone that is following the rules of the zone’s new fiscal treaty, and is anyway running an annual deficit of a mere 2.7 per cent of GDP (about one-third the size of Britain’s and half that of Spain), it still finds the yields on its government bonds regularly spiralling up towards the dangerous territory above 7 per cent.

One reason for that is the country’s recession: the latest consensus forecasts have the economy shrinking by 2.1 per cent this year. Another is the general concern about the stability of the eurozone: if a Greek exit were then to cause a run on Spain, the contagion would inevitably spread to Italy, so investors are pricing in that risk. A third is the anti-euro talk being circulated by Beppe Grillo and fostered too by Berlusconi: this creates a political risk that again must be considered. But there is also a fourth and even bigger reason: it is that Italy’s real problem is not fiscal. It is its chronic lack of economic growth—not just in this year’s recession but over two decades. Unless markets start to believe that this could change, then sovereign debts of 120 per cent of GDP, totalling €2 trillion, are always going to pose a risk, regardless of the fiscal deficit.

Italy’s sovereign debt, after all, is nothing new, unlike those of Greece, Ireland, and Spain. It was accumulated by the big budget deficits run by governments during the 1970s and 1980s, an era when domestic terrorism (491 people died in political violence from 1970–87) and industrial strife led politicians to try to buy social peace by creating generous public pensions and at last constructing a national health service. Budget deficits averaged an astonishing 9.8 per cent of annual GDP in 1973-95. This kept economic growth going, rather artificially, as did frequent devaluations of the lira, but the price was high inflation and, in 1992, as noted earlier, a financial and political crisis.

Being used to something can, however, make dealing with it harder, and that has been the Italian condition. Complacency, mixed with a parasitical, corrupt political system and an electorate that holds national politics in a high degree of contempt, thwarted reform in 1992-2012.

Which is where Italy and Monti stand now: confronting selfishness and scepticism about liberal solutions. The recipe for the country’s transformation is chiefly based in economics and the enforcement of the rule of law; but whether it ever gets into the oven and then out onto the table will be determined by politics.

The liberal reforms have begun, stealthily, but have barely scraped the surface of what needs to be done. No responsible international investor ought now to be lending to Italy on the basis of any wave of liberalisation or structural reform, for there hasn’t been one. Instead, they have to place their bet on politics and the jockeying for position ahead of, and then after, the forthcoming general elections.

Neither Grillo nor Berlusconi offer any hope to Monti’s liberal cause. But although they are hogging centre stage in the political drama, they are not the only players.

Speaking trenchantly from the wings is the young mayor of Florence, the 37-year-old, Tony Blair-admiring Matteo Renzi, who hopes to oust the old establishment of the main left-wing party, the Democratic Party, in primary elections to become their prime ministerial candidate. There is also a key member of Monti’s own government, a former bank chief executive no less, Corrado Passera, who is widely tipped to make a run for conventional politics from his current position as Minister for Economic Development. And rivalling Berlusconi as a budding kingmaker is Pier Ferdinando Casini, head of the small UDC party, formally the heir to the old Christian Democrats.

Between Messrs Renzi, Passera and Casini there is the glimmer of hope for a post-election coalition that Mario Monti would feel comfortable with, leaving him free to steer matters from the Popes’ old Quirinale home as president of the Republic. Achieving that dream coalition will be a tall order. But as the autumn evolves, it is progress towards that which any investor, economist, or even simply sympathiser for the euro must watch and pray for. It is only that sort of longer-term, democratically elected government that would be capable of implementing the Monti-Einaudi vision.

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  1. October 21, 2012


    Gentile sig. Emmott, ho letto con interesse il suo articolo apparso questa settimana su Internazionale.
    In questo articolo lei ribadisce più volte che il M5S di Grillo è a favore dell’uscita dell’Italia dall’Euro. Non so con quali intenti lei faccia queste affermazioni, perché basta leggere il blog Beppegrillo per capire che ciò che lei dice è falso.
    Infatti le uniche affermazioni di Grillo riguardo all’euro sono queste: “non so se sia meglio restare nell’euro oppure uscire; l’unica cosa che penso è che a decidere siano gli Italiani e non i banchieri”.
    La invito pertanto ad apportare le opportune rettifiche nei suoi futuri interventi, se ci saranno.

    Cordiali saluti
    Dario – amante dell’onestà intellettuale

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