Don’t expect the euphoria over a new Italian government to last long. There is no need to share it. The markets enjoyed a relief rally on news of a new government forming in Italy. The European establishment is behind Mr Monti, so we should expect the ECB and the spin machine to try to engineer some better results in the bond markets this week to get him off to a good start.
The tasks ahead for him are not easy. He first faces the challenge of putting together a coalition of support within the Italian Parliament when he has never stood for election or been an active party member. He needs the support of Mr Berlusconi’s party. This grouping wants an early election, and is so far only prepared to back the new Prime Minister to implement the measures which Mr Berlusconi rushed through last week. They are likely to quibble about any new measures. The Northern League do not wish to back him, leaving him dependent on the forces of the left, with their strong links to the Trade Unions. They will be suspicious of public sector cuts. Over the weeks ahead we will learn that the first rush of enthusiaism for a PM above politics and for a government of national unity may not miraculously bury all old differences, rivalries and legitimate political ambitions of the parties and people who did get elected.
He next faces the even greater challenge of the poorly performing Italian economy. Italy is in the icy grip of Euro deflation. Italy’s cost base is far too high to compete successfully with Germany within the zone. Money supply is falling, unemployment is high, and living standards have been static for a decade. There is nothing Mr Monti can do to the money supply and exchange rate given Euro membership. Efforts to make Italy more competitive require cutting internal prices and wages, against the combined opposition of business and Trade Union lobbies. The need to make the public sector smaller and more efficient will be resisted by deeply embedded public sector defenders.
Mario is clearly an intelligent man. He has made a good career out of his diplomatic skills as a pro EU official. His time as Competition Commissioner meant he was one of the senior people in the EU responsible for economic policy. To some that makes him a talented administrator who can take on another difficult job. To others it associates him with the failure of the European economic model to generate jobs and prosperity on a sufficient scale. Individual critics complain that his famous case against Microsoft did little to help the EU economy. The team he belonged to heaped regulation on regulation, as they sought to extend the EU’s finger into every pie.
He did recently author a report into developing the Single Market in the EU. This Report provides good analysis of the different political forces within the EU that had led to “integration fatigue” and “market fatigue”. Mr Monti proposed a large programme of further integration, offering to the Anglos Saxons more market opening and competition measures, to the continental social democrats more tax “co-ordination” and common welfare, and to the newer nations more emphasis on investment and European networks. He sought more workers rights and a more competetive market, more public procurement and social service provision. He decided the EU needed a stronger single market to back the single currency. He recognised the big advance made by the Lisbon treaty in favour of more integration, seeing in it full recognition of the need for a”highly competitive social market economy”. He wished to use the powers of the Lisbon Treaty to complete a European level government over most things that matter.
That is Mr Mario’s problem. He is well versed in how to extend EU power and influence through a mixture of right and left facing measures. His Report did not, however, set out how the EU could start to compete more successfully with China, Brazil, India or the USA. Mario may find it is not easy being super when it comes to turning round an ailing economy locked into the Euro at the wrong exchange rate. Markets may enjoy a supporting wind from the EU for a bit for his efforts, but the full Monti is likely to be just more European government rather than a bracing fix for Italy’s problems.
People are rightly alarmed at the easy way two European democracies have been pushed over by EU officialdom. The ever tightening grip of the Euro has given the EU the power of the purse over them. He who has the money has the management in this governing situation. Whether Mr Monti can win support within and outside the Italian Parliament for long enough to have an impact remains to be seen. Going by the policies he and his fellow Commissioners followed for the whole of the EU, he does not have a plan for prosperity and growth which is going to work.