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Forget Greece. The real problem is the threat of bankruptcy in Rome.
But it is Italy that may well be decisive in determining the outcome of the euro crisis.
Most analysts agree that Italy's survival is vital if the euro zone is to avoid catastrophe. “The euro zone can do, if needs be, without Greece," said Timo Klein, senior economist at IHS Global Insight. "But it certainly cannot do without Italy.”
The man leading the rescue mission? Mario Monti, who just three months ago was an economics professor in Milan.
Now the new prime minister, Monti is firmly in the driver's seat in Rome, tasked with steering Italy away from the precipice of insolvency, and thus protecting the euro zone from a fatal blow. And many analysts predict that if anyone can pull it off, he can.
The former EU competition commissioner replaced Silvio Berlusconi in November as the euro crisis lapped at Italian shores. With his unelected government of technocrats, he is now attempting to slash Italy’s debt mountain of 1.9 trillion euros ($2.4 trillion), in a bid to stop the European sovereign debt crisis from engulfing the euro zone’s third biggest economy.
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In December he pushed through a 30 billion-euro emergency budget for the next three years, a mix of tough cuts and tax hikes. However, amid fears that this could trigger a recession, he has also implemented a growth strategy, introducing a raft of measures to liberalize the economy. And he is also appealing to the EU, particularly Germany, to think beyond austerity measures.
His efforts have been broadly welcomed back home. Although Standard & Poor's downgraded the country by two levels to BBB+ on Jan. 13, the cost of servicing Italian debt has started to go down.
Italy’s public debt is currently the equivalent of 120 percent of gross domestic product. Unease about its ability to service that debt had pushed bond yields up above 6 percent, and even as high as 7.6 percent last November, a rate that is not sustainable in the long run. “If such yields were to prevail and make the refinancing of the existing debt stock all the more expensive, then this would at some point in the future certainly also lead to Italian insolvency,” said Klein, of IHS Global Insight.
The policies Monti has pushed through so far are creating the impression that Rome is at least taking action. “The fact that these measures are now in the pipeline is already a big step forward, and this has at least contributed to the reduction in government bond yields over recent weeks,” Klein said.
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Monti’s approach, particularly in contrast to that of his predecessor, has gone a long way toward improving Italy’s credibility. Berlusconi seemed to be in denial about the extent of the threat facing Italy, but Monti appears to take it very seriously.
The prime minister’s professorial, reserved style couldn’t offer a starker contrast to that of the brash Berlusconi.
“Although his manner is less than charismatic — he doesn’t actually set the house on fire when he speaks — he’s a very good politician,” said James Walston, professor of international relations at the American University of Rome. “He knows how to put pressure and where to put pressure appropriately.”
Monti’s ambition has been a defining element of his tenure. As a follow-up to the cuts in December, on Jan. 20, his government unveiled a plan to shake up Italy’s economy in order to kick-start growth, a move that has been sorely lacking in recent decades. The country’s growth averaged a paltry 0.2 percent from 2000 to 2010, compared to 1.1 percent in the euro zone as a whole.
To further promote growth, Monti is fighting to open up competition in traditionally closed professions, such as those of taxi drivers, lawyers and pharmacists. His government estimates it could grow the economy by over 1 percent with these instruments alone. He also plans to start talks between unions and employers to open up the labor market and improve productivity.
The moves have so far met stiff resistance. The country was paralyzed in late January, when truckers and cab drivers blocked the streets with their vehicles in protest.
“Small groups are defending their privileges — and they may be small — but they can inflict serious wounds on the government,” said Gianfranco Pasquino, professor of political science at the Bologna Center of John Hopkins University.
“Italian society is largely fragmented,” he said, and these small interest groups are “very well organized and located in strategic positions.”
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Although they can make trouble, Walston argues that they have little support from ordinary Italians, who broadly back Monti’s plans. “Despite the nasty measures he passed at the end of last year, he still has a 59 percent approval rating.”
And for the time being, the political parties, even including Berlusconi’s, are letting him get on with his program. “They are afraid of being blamed for the catastrophe that would happen if they brought the government down,” Walston said.
Meanwhile, as Monti imposes pain on his people, he wants to see some concessions from his European partners. He argues that Italy cannot do it alone, that expecting individual countries to impose austerity measures won’t solve the crisis. “National efforts may fail without EU support,” Monti told the Italian Senate in late January. He argued that it was essential for Europe to have a more integrated approach to the crisis.
He has already demanded that the euro zone bailout fund be doubled from 500 billion euros to 1 trillion euros, something Germany opposes.
But what Rome says matters these days. “Italy is too big to fail,” Pasquino said. “This is, in the medium run, in the interest of all economic operators and of the other states of the EU.”
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