Italy’s Monti Urges Political Support for Reforms

Italy has time, but it cannot afford to waste it. The reforms Mario Monti calls for are long overdue.

Italy’s technocratic prime minister, Mario Monti, has urged political support for reforms in order to avoid the Southern European country becoming the next victim of the continent’s spiraling debt crisis.

He knows that now is not a time for complacency.

Losing popularity

Pension and spending cuts as well as tax hikes have undermined Monti’s popularity. The parties that keep him in power both lost heavily in May’s local elections and are wary of voting for the reforms Monti has proposed to make Italy more competitive.

The prime minister urged parliamentarians on Wednesday to press ahead. “We should use these new difficulties to double our efforts both on the European front and within Italian politics,” he said.

Growing political opposition

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 both resisted a proposal to remove the obligation on the part of businesses to rehire workers who are deemed by a judge to have been wrongfully terminated.

Because Italian workers tend to appeal layoffs, labor decisions are often mired in years of legal battles.

The Democrats have otherwise supported Monti’s reforms, including a raise in the pension age.

Former prime minister Silvio Berlusconi’s conservative party favors labor-market reform but is increasingly uncomfortable with Monti’s deficit reduction efforts

Nervous markets

Capital markets are reacting negatively to the erosion in Monti’s support. If Italy’s politicians cannot find a consensus on how to reduce high government spending and raise growth, interest rates on Italian sovereign bonds will likely rise again.

Open Europe, a British think tank, has 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 savings by 2014.

There is still time

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 at home. 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 or Spain’s. Italy still has time, but it cannot afford to waste it.