Monti Failed to Thoroughly Liberalize Italy’s Economy

The technocrat had to water down many of his reforms.

When Mario Monti became prime minister in November, his country teetered on the brink of sovereign default. The former European commissioner was hailed at home and abroad as the man who would save Italy from financial ruin.

Monti called for budget cuts and economic and pension reforms to stabilize Italy’s debt and improve its competitiveness relative to other members of the eurozone.

More than a year later, little progress has been made.

More cuts than reforms

Monti’s cabinet has raised property and value-added taxes and achieved savings by raising the retirement age and cutting public-sector salaries 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 reforms that would have lifted restrictions on a number of professions and made it easier for companies to fire workers. Trade unions and the left-wing Democratic Party, which is likely to win next year’s election, were angered by a proposal to remove the obligation on the part of businesses to rehire workers who are deemed to have been wrongfully terminated.

Such rigid labor laws prevent Italian businesses from hiring and discourage foreign companies from setting up shop in the country.

Resistance from insiders

Even with Monti’s changes, conditions remain far more flexible in the creditworthy nations of the north of Europe.

Monti planned to liberalize the drug and taxi markets and relax regulations for notaries and lawyers, but had to water down such proposals under pressure from political parties.

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 backed down.

Aspiring pharmacists 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 field.

Taxi drivers and petrol stations similarly resisted efforts to economize. Plans to lift 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 was set on the number that can be employed in the industry, making it even harder for law graduates to start a firm.

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 and can be susceptible to political interference, forcing companies to settle out of court.

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

Three-way contest

A small coalition of centrist parties wants Monti to return to power after February’s election.

However, unless Berlusconi, who is again leading the right, upsets the polls and returns to parliament with a plurality of the seats, Democratic Party leader Pier Luigi Bersani looks more likely to succeed the technocrat.