Next Steps for Italy Uncertain After Departure of Euro Zone Power Broker
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Version 0 of 1. LONDON — Cerebral, bespectacled and more at home at a seminar than in the bear pit of Italian politics, Prime Minister Mario Monti for the last year has quietly restored Italy’s weight in European diplomacy while helping mend its battered credibility with the financial markets. So Mr. Monti’s announcement over the weekend that he intends to stand down from his job running the euro zone’s third-largest economy poses a worrying question: is Italy about to go back to its bad old ways? To be sure, Mr. Monti, a polished university professor and former top European commissioner for competition, is an unelected caretaker who always said he would serve only until elections that were scheduled for next spring but are now expected in February. But in his year in power he has embarked on economic reforms and calmed jittery financial markets, aided by a late-summer pledge by another Mario — Draghi, head of the European Central Bank — to help tamp down the borrowing costs of euro zone governments by standing ready to buy their bonds in unlimited amounts. That pledge so far has been enough to help reverse a summer run-up in the interest rates on the bonds of Italy, as well as Spain. And as a result, the market interest rate for 10-year Italian bonds now stands at only 4.5 percent, compared with more than 7 percent at the beginning of the year. Italy’s financial and economic problems, though, have not magically disappeared. It continues to stagger under a debt load of around 125 percent of gross domestic product, suffers acute problems of competitiveness and youth unemployment, and its economy is expected to contract this year and next. It will bear watching how the bond markets respond on Monday, in the first day of trading since Mr. Monti announced his planned exit. “This is the first test of the externally driven resilience of the Italian bond markets, because they have been buttressed by the E.C.B.’s bond-buying program,” said Nicholas Spiro, the managing director of Spiro Sovereign Strategy in London. “Do I expect a massive sell-off?” Mr. Spiro added. “No. Do I expect that this will jolt the market out of its complacency? Yes.” Mr. Monti’s grasp of economics and experience in European politics has made him a power broker who took regular calls from the White House and aligned with France and Spain to wring euro-zone concessions from a reluctant German chancellor, Angela Merkel. “He’s ushered in a turning point in Italian politics and has been a major influence in Europe,” said Thomas Klau, head of the Paris office of the European Council on Foreign Relations. “He has helped turn Italy into a serious country again, in the eyes of foreign investors and also many of its own citizens.” Part of the reason for Mr. Monti’s reception lies in the contrast between his leadership and that of his predecessor, Silvio Berlusconi, the man now trying to make a political comeback Mr. Berlusconi, a flamboyant billionaire media boss prone to scandal, never hit it off with the most powerful leaders in the European Union, particularly Ms. Merkel, who heads the country with the single biggest influence on euro zone policies. Last year Italian newspapers reported that wiretaps had recorded Mr. Berlusconi referring to her in sexist and insulting terms. European leaders became accustomed to his antics. At a summit meeting in 2003, for example, Mr. Berlusconi declared, “Let’s talk about football and women” before turning to the German chancellor at the time, Gerhard Schröder, who had been married four times, and suggesting he take up the conversation. But the euro crisis raised the stakes. Soon after the European Central Bank intervened in August 2011 to buy Italian bonds and reduce Italy’s inflated borrowing costs, Mr. Berlusconi appeared to backtrack on reform pledges he had made to obtain that support. When asked at a summit meeting later that year whether Mr. Berlusconi’s pledges could be believed, Ms. Merkel and Nicolas Sarkozy, who then was the French president, smirked, highlighting that by then not even his fellow leaders took him seriously. By contrast, the technocratic and professorial Mr. Monti, who speaks fluent English and French, is a natural on the Brussels circuit. And he has been committed to Germanic-style budgetary rigor — making him, in Mr. Klau’s words “a very Prussian sort of Italian.” The economic changes introduced by Mr. Monti, including steps to reduce the deficit and encourage entrepreneurship, created space for the central bank to use its financial resources more aggressively in ways that helped Italy as well as other stricken countries. For example, beginning in December 2011 the E.C.B. allowed banks in the euro zone to borrow as much money as they wanted for three years at the central bank’s benchmark interest rate, which is currently 0.75 percent, the lowest in the euro zone’s history. Banks drew some €1 trillion, or $1.3 trillion, and Italian ones were among the heaviest borrowers. The infusion of cash probably prevented a severe credit crunch in Italy and other countries. It is questionable whether the central bank would have been willing to risk so much money on the Italian economy if Mr. Berlusconi had still been presiding in Rome. Mr. Draghi has avoided commenting publicly on Mr. Monti or any other politician, but there is an obvious affinity between them. Both are Italians who trained as economists and have pursued careers in public policy. Both have worked for Goldman Sachs and both have been nicknamed “Super Mario.” Yet, while Mr. Monti will be a hard act to follow, Italy’s road ought to remain easier than it was when he took over last year. “It is extremely unlikely that we will see a dynamic unfolding which would bring Mr. Berlusconi back to power,” Mr. Klau said, “so, even if Mr. Monti were to leave the political stage for good, we would not go back to the political situation we were in before.” For one thing, the European Central Bank’s pledge to buy bonds has, according to Mr. Spiro, been a “game-changing event, the most important development in euro zone bond markets since the euro zone crisis.” Most analysts believe that even if there is a rise in the Italian borrowing costs, Mr. Draghi’s plan is unlikely to come unstuck in the short term. For another, Mr. Monti has already succeeded, along with France’s new president, François Hollande, in persuading Germany to temper its insistence on austerity budgets, given the evidence that such an emphasis risks pushing the euro zone into years of stagnation. Optimists argue that political uncertainty in Italy might even have a positive side effect if it pushes euro zone leaders to compensate by making tough decisions to repair some of the structural weaknesses in the single currency. On past evidence, the lack of market pressure usually means leaders delay difficult decisions. So a little instability might prompt European Union leaders, who meet in Brussels this week, to break the deadlock over a crucial plan to create a banking union. Nevertheless the likely departure of Mr. Monti is a setback for Europe, which will lose a heavyweight leader, and for Italy, which has experienced a year of unaccustomed influence inside the bloc. It will also deprive the southern economies of the euro zone, including Spain, Portugal and Greece, of a leader with real credibility. “While there is no reason to assume that his departure will trigger a descent into a measure of chaos and instability, it is still bad news,” Mr. Klau said, “because he is a competent interlocutor with real intellectual and moral authority in a small, informal steering group in the club of leaders.” <em>Jack Ewing reported from Frankfurt.</em> |