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Italian Prime Minister Mario Monti returned home from a successful visit to the United States over the weekend, having won the praise of U.S. President Barack Obama for the rapid economic reforms he has implemented since replacing Silvio Berlusconi in November. Obama’s endorsement followed plaudits on both sides of the Atlantic for Monti’s bold package of budget cuts, tax increases, and deregulatory measures. Yet although the prime minister has given the global financial markets hope that his country can climb out of its immediate fiscal emergency, Italy’s real dilemma is political, not economic. Unless Rome fundamentally alters its political culture, the changes that the Monti government has brought to Italy -- greater sobriety and a stiff dose of liberalization -- are unlikely to endure.
Monti, an academic and a former European Union commissioner for competition policy, took office to lead a unity government and enforce a program of austerity. He quickly persuaded the Italian parliament to pass a package of tax increases, pension reforms, and spending cuts that he called the Save Italy decree. Monti has also demonstrated that he will no longer tolerate Italy’s rampant tax evasion; high-profile raids by the Guardia di Finanza (tax police) on resorts frequented by the rich and famous have sent a clear message to the wealthy professionals who drive luxury cars but declare lower incomes than factory workers. To compensate for the recessionary consequences of the Save Italy package, in January, Monti proposed a Grow Italy decree, designed to free up the service sector and inject competition into the economy.
Monti’s efforts have paid off. In only three months, for example, the yield on ten-year Italian government treasuries, which had exceeded seven percent -- the rate at which both Greece and Portugal had to seek bailouts -- has declined to 5.6 percent. Italy, it seems, is no longer on the brink.
Yet the question for Rome is whether the reforms of the Monti government will last. It has implemented them under the threat of economic calamity at home and in the eurozone -- a threat so dire that it temporarily united Italy’s fractious political parties. But with that menace removed and Monti likely out of the picture by Italy’s next scheduled elections, in 2013, odds remain that Rome will fail to make the structural changes necessary to consolidate Monti’s work.
It is crucial to understand that Monti’s attempt to implement fiscal discipline and deregulation is a responsibility that Italian political parties have mostly avoided taking for the past 20 years. Italy’s problems began during the Cold War, when the ideological divide between the Communists (PCI) and Christian Democracy (DC) dominated the country's politics. To keep the PCI from taking power, the DC and its allies used public funding unscrupulously. In the 1980s, when the Socialist Party (PSI) began to gain power and compete with the DC to buy votes, public spending exploded. Between 1980 and 1994, Italy’s debt as a proportion of GDP doubled, to 120 percent. Political corruption and collusion with the Mafia, always a problem, became endemic.
In April 1992, in Italy’s first elections since the end of the Cold War, the Italian public rebelled against such misgovernment. The populist party Lega Nord (Northern League) took millions of votes from the DC and the PSI. Rocked by the election results, the leaders of those parties then faced a series of corruption investigations, which further discredited the political elite. Former Italian prime minister and PSI leader Bettino Craxi memorably jumped bail and fled to Tunisia.
The measures that Monti is now introducing should have been implemented during this period of political renewal -- especially because Italy had then committed itself to joining what would become the eurozone, which called for stringent fiscal responsibility and economic liberalization. Instead, save for a brief period between 1996 and 1998 when a center-left government implemented a crash program of privatization and tax increases, Italy’s politicians have largely shrunk from the task of adopting the necessary but deeply unpopular reforms.
In addition to avoiding the steps needed to modernize Italy’s economy, the country’s political class has failed to modernize its institutional culture. Although new politicians, above all Silvio Berlusconi, emerged in the wake of the 1992 crisis, and although the survivors of the old system remodeled their identities, the ethos of politics in Italy has not changed. Corruption is still rife, parliamentary institutions are still slow and inefficient, and the electoral laws are still crafted to protect incumbents. Worst of all, the leaders themselves remain above the law; Silvio Berlusconi is merely the best-known case of a politician with frequent brushes with the judiciary.
Meanwhile, since the 1990s, the party system has failed to stabilize. The Berlusconi-led coalitions of 2001-2006 and 2008-2011 were marred by permanent wrangling among the parties that composed them. His People of Liberty (PdL) party currently commands the support of perhaps 20-25 percent of likely voters. To win the elections, however, the PdL would need not only the support of the Northern League -- which it currently lacks -- but also the backing of the Third Pole, a loose alliance of centrist Catholic parties, to have any chance of winning a future election. But the leaders of the Third Pole have broken with Berlusconi once already and will not work with the League, which they regard as racist and unpatriotic.
The center-left also remains in poor shape. The largest member of that bloc, the Democratic Party (PD), is a deeply factious party created by the slow fusion of the left of the DC with the moderate majority of the former PCI. The PD enjoys between 25 and 30 percent support in the polls, but to govern it needs the endorsement of the Third Pole, the populist Italy of Values party headed by a former prosecutor named Antonio Di Pietro, and of the Left Ecology Freedom movement, most of whose leaders are on the radical, antiglobalization left -- a force that has undermined previous center-left governments.
At present, Monti is in power only because the president of Italy, Giorgio Napolitano, compelled the PdL, the PD, and the Third Pole to reach a truce before Italy fell into the abyss. These parties give Monti a large but unenthusiastic majority in parliament. At best, Monti’s government will last until the next series of elections, in spring 2013, and, if the financial crisis recedes to the point that regular politics can resume, it may fall even sooner.
Yet there is much left for Monti to accomplish. The Grow Italy decree is merely a starting point; for Italy to remain in the elite club of nations, Monti must reform the country’s byzantine legal system (it takes, on average, ten years to resolve a civil case in Italy), wasteful local government, creaking health sector, and dysfunctional universities. But changes in those areas would arouse severe opposition.
The real question facing Italy, then, is not whether “Super Mario” can save Italy but whether any non-technocratic government can continue his work. Technocrats cannot govern forever; according to a recent poll by the Italian think tank ISPI, 90 percent of Italian voters currently express disenchantment with the existing political parties. For now, however, Monti is the only option. If his government can generate more growth and employment, his successors may adopt his policies. If he flounders, Italy’s political dysfunction -- and thus its economic dysfunction -- will likely deepen.
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