By: Dr. Mike Campbell
Silvio Berlusconi has resigned as Italian Prime Minister after getting an austerity budget through parliament. He has been replaced not by a politician, but an economist and former European Commissioner, Mario Monti. The new PM is not an elected member of the Italian parliament and the government he has formed is unique in that it contains no political figures. Could this be the world’s first technocrat coup d’etat?
Italy finds itself in dire straits. It has become the focus of the Eurozone crisis and as the third largest economy within the 17 member Eurozone block, its fortunes are critical to the credibility and even the survival of the Euro itself. Italy has managed to amass debts estimated to be in excess of €1.8 trillion; a figure which equates to 118.3% of its GDP.
Whilst Italy has had substantial debts for a long time, it is bedevilled by anaemic growth which means that paying down the debt is challenging. The Greek debt crisis has thrown a spotlight on European sovereign debt. Markets have become nervous about these enormous financial black holes and this has driven the cost of borrowing upwards. Italy is being asked to offer 7% on its 10-year bonds whereas Germany has to find just 1.8% to attract investors to its 10-year bonds.
Mr Monti’s first challenge is to convince markets that he has a viable plan for getting the economy and debt under control. If he does this, the yield on bonds will fall, making servicing Italy’s debt mountain more manageable. His government has won the support of the upper house and now needs the blessing of the lower house in a second confidence vote. He has promised to balance Italy’s budget by 2013 and reduce the nation’s debt, but, of course, the devil is in the detail. Monti hopes to balance austerity measures with economic growth and to provide “social fairness”.
Targets for technocrat reform include the pension system; tax evasion; the tax system, a crackdown on organised crime and the re-establishment of a local property tax. He also plans to stimulate employment of young people and women, in particular.
Berlusconi has implied that he will bring the government down if he doesn’t like the way things are going, but perhaps having an unelected government will mean that they are less concerned about voter approval than their counterparts. It also means that Italy’s politicians can distance themselves from what are bound to be the difficult and unpopular decisions that the technocrats must make. Interesting times.