Monti Failed to Thoroughly Liberalize Italy’s Economy

The technocrat prime minister had to water down most of his economic reform plans.

Italian prime minister Mario Monti with the head of the European Central Bank, Mario Draghi, during a European Council meeting in Brussels, May 14 (The Council of the European Union)
Italian prime minister Mario Monti with the head of the European Central Bank, Mario Draghi, during a European Council meeting in Brussels, May 14 (The Council of the European Union)

Italy’s technocratic prime minister Mario Monti formally tendered his resignation on Friday after the country’s largest conservative party had withdrawn its support from his government. Monti announced on Sunday that he is willing to resume his premiership if there is ample political support for him after February’s election but a majority of Italians would not like to see him come back.

When the former European commissioner became prime minister in November of last year, his country teetered on the brink of sovereign default and Monti was hailed both at home and abroad as the man who would save it from financial ruin. He proposed tough budget as well as economic and pension reforms that were designed to stabilize Italy’s debt and improve its competitiveness relative to other members of the eurozone.

But more than a year after Monti began his work, little progress for the long term has been made.

Monti’s cabinet has raised property and value-added taxes and achieved savings by raising the retirement age and cutting public-sector pay and subsidies to local governments, thus putting the budget on a more sustainable trajectory, but the announced economic reforms have been tepid.

In March, the government was forced to delay labor market reforms that would have lifted restrictions on a number of professions and made it easier for companies to lay off workers. Trade unions and the left-wing Democratic Party, which is likely to win next year’s election, were angered by a cabinet proposal to remove the obligation on the part of businesses to rehire workers that are deemed by a court to have been wrongfully fired.

Such rigid labor laws prevent Italian businesses from hiring and discourage foreign companies from setting up shop there. Even with the Monti government’s changes, conditions remain far more flexible in the creditworthy nations of the north of Europe.

Monti intended to liberalize the drug and taxi markets and open up the field for notaries and lawyers but has had to water down his proposals in all of these areas. Thousands of more drugstores were supposed to be added and the plan was for them to be able to sell prescription medicines independently. But under pressure from pharmacies, the government pulled its plans. Aspiring pharmacists now still have to prove a “tradition” to open a drugstore. As a consequence, it’s virtually impossible except for the children of active pharmacists to enter the profession.

Taxi drivers and petrol stations similarly resisted most efforts to economize. Plans to lift professional restrictions on attorneys were halfhearted. Minimum tariffs imposed by the previous government, led by Silvio Berlusconi, were abolished but in order to compensate lawyers, a maximum has been set on the number that can be employed in the industry, making it even harder for law graduates to start a business.

Italy’s judicial system is among the most bloated in the world. It employs some 211.000 lawyers compared to 155.000 in Germany which has twenty million more citizens. Trials take up to 1,000 days on average and can be susceptible to political interference, forcing companies to often settle out of court.

Retailers have been the only real beneficiaries of Monti’s liberalization program. Legally mandated shop hours and sales periods have been abolished, if to the chagrin of small businesses who fear that they will not be able to compete with chain stores.

A small coalition of centrist parties supports Monti returning as premier after February’s vote. However, unless Silvio Berlusconi, who is once again the prime ministerial candidate for the right-wing Il Popolo della Libertà, manages to upset the polls and return to parliament with a plurality of the seats, left-wing leader Pier Luigi Bersani looks likely to succeed the technocrat at the helm of the world’s eighth largest economy.

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