Italy's designated premier, Mario Monti, must move quickly on
economic reforms to calm financial markets. He and the Italian
people have perhaps only days to signal their willingness to
fundamentally change. At stake: their country, the euro, and the
Italy has a nearly 3,000-year history of violent and costly
attempts at cohesion. Now, its people must take unity to a totally
new level, coming together over painful reforms that will make or
break the world's eighth-largest economy - and the euro currency
that holds much of Europe together.
The Nov. 12 resignation of Italian Prime Minister Silvio
Berlusconi gives the country the opportunity to defy its history.
The designated premier, Mario Monti, is a respected, Yale-educated
economist, whose support for substantial reforms is an encouraging
sign after 17 years of chaotic rule under Mr. Berlusconi. But a
daunting number of things will need to go right - and quickly - for
Professor Monti to save the country.
First, a new Italian government must instill confidence within
bond markets that it can actually meet its debt payments. Italy
needs over $400 billion in external financing next year alone to
cover its projected spending. By comparison, Greece's much smaller
economy has a projected budget shortfall of about $20 billion.
Rome has to get this financing either from the bond market, or
from bailouts by other governments and the International Monetary
Fund. Yesterday marked the first test of the market's willingness to
lend to post-Berlusconi Italy. The government was able to sell over
$4 billion in bonds, but at a significantly higher cost in interest
rates than previous bond sales.
Market confidence could be strengthened if the new caretaker
government in Rome quickly implements a package of budget cuts and
reforms that the Italian Senate passed on Nov. 12. This mix of
spending cutbacks, changes to labor laws, and efforts to streamline
government regulation is a recipe of "orthodox" reforms that many
Latin American and Asian economies implemented in the 1980s and
1990s. What the approach lacks in originality it makes up for in
Second, and most important, Italy has to fundamentally alter its
political culture. Every level of government in Italy - basically,
the rhythm of Italian life itself - is highly organized and deeply
If financial markets sense hesitation, they will stop lending the
government money, and the country will be forced into a disastrous
default. The markets will perhaps give Italy's people and
politicians only a few days to mount a convincing case that they are
willing and able to take on Italy's political machinery and economic
Italy actually had sufficient time to pay off its debt - before
the European debt crisis in other countries forced the issue. While
Italy's total debt level is high at 120 percent of gross domestic
product, its annual fiscal deficit is about the same as Germany's.
And its economy comprises a healthy mix of industry and services,
with a robust export sector.
But failed attempts by Europe to articulate a convincing plan to
manage eurozone debts pushed Italy to the brink by forcing up costs
of borrowing. …