Italy’s technocratic prime minister Mario Monti urged political support for reforms on Wednesday to avoid the Southern European country becoming the next victim of the continent’s spiraling debt crisis. He knows that now is not the time for complacency.
Monti, who was appointed in November of last year, has enjoyed the support of both Italy’s main left- and right-wing parties to implement austerity measures that were deemed necessary to stave off a debt crisis.
The country’s public debt stands at over 120 percent of gross domestic product and it continues to struggle to borrow at an affordable rate on financial markets.
Pension reductions, spending cuts and tax hikes have undermined Monti’s approval rating. The political parties that keep him in power both lost heavily in May’s local elections and are wary of voting for the market reforms proposed by Monti to make Italy more competitive relative to other economies in the eurozone.
The prime minister asked parliamentarians on Wednesday to press ahead with liberalizations. “We should use these new difficulties to double our efforts both on the European front and within Italian politics,” he said.
In March, Monti’s government was forced to delay labor reforms that would have lifted restrictions on a number of professions and made it easier for firms to lay off workers. Italy’s largest trade union and the left-wing Democratic Party were both angered by a cabinet proposal to remove the obligation on the part of businesses to rehire workers that are deemed by court to have been wrongfully fired.
Because Italian workers tend to appeal layoffs, labor decisions are often mired in years of legal battles in the nation’s notoriously slow legal system.
The Democratic Party has otherwise supported Monti’s reform agenda, including a raise in the retirement age. The right-wing Il Popolo della Libertà (“The People of Freedom”), former prime minister Silvio Berlusconi’s party, favors labor market reform but is increasingly uncomfortable with Monti’s deficit reduction efforts
Capital markets are reacting negatively to the erosion in popular support for Monti’s reform agenda and uncertainty about what government will replace his after the 2013 election. If the country’s fractured political system fails to deliver consensus on how to reduce high government spending and increase economic growth, interest rates on Italian sovereign bonds will likely continue to rise.
The Open Europe think tank calculated that if Italy has to roll over expiring debt at present interest rates, it could cost it an extra €38 billion over the next three years and up to nearly €60 billion over the next five which would undo all of Monti’s budget savings by 2014.
All the same, an Italian financial crisis seems unlikely. Its bank are solid. They have little external exposure to other high debt countries in the periphery of the single currency union and a solid deposit base. Italians corporations and households are not heavily indebted. The private sector, though lagging behind in terms of productivity to other European countries’, is not in a crisis comparable to Greece’s and Spain’s. Italy still has time but it cannot afford to waste it.