Italian Prime Minister Monti Cannot Do Magic – Bond Yields Are Up Again, The Economy Is In Recession, And Unpopular Reforms Are Stuck

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By Paolo von Schirach

June 14, 2012

WASHINGTON – The Wall Street Journal seems to be somewhat surprised that Prime Minister Mario Monti has hit a political sandbar and is now stuck, (Italy’s Reform Stall, June 14, 2012). Its editorial laments the fact that Monti is raising taxes too much while he is unable to reform the “Statuto dei Lavoratori“, the “Workers Charter”, one of the most insane pieces of labor legislation in the modern world.

Protecting workers right

In case you do not know this, in Italy it is practically impossible to fire anybody, given the armor plated protection given to employees by this law. And you can figure out that an extremely rigid labor market is bad for business. Labor flexibility would provide incentives to new enterprise. In fairness to Monti, he tried, as he tried other things. But Italy, while not crazy as Greece, is a close relative. Serious reforms run against ultra established special interests that will never give up.

Uninspiring fiscal and economic picture

In Italy the short term fiscal picture is not so bad. But the rebalancing of public accounts came at a huge price. Tax rates are confiscatory. And a new increase in the VAT tax is in the works.

Meanwhile, looking at the long term fiscal picture, with public debt still at 120% of GDP, investors are penalizing Italy. Bond yields are up. The 10 year is once again above 6%. And the economy is in recession, while youth unemployment is now at a stunning 36%. The young Italians who have a chance emigrate to Brazil, or wherever there seem to be prospects.

Monti is a well meaning technocrat. But the notion that he had some kind of magic formula to fix public spending and the economy, all by himself and painlessly, was and is ludicrous. Today, as the Italians realized that most disappointingly he cannot do magic, his favorable rating in opinion polls plummeted to 34%.

Lessons for America

As I said, Italy is not Greece; but we are getting there. As for America, it would be nice if someone started reflecting. This is what out of control public spending, generous entitlements and slow growth gets you: national decline. This is still America, mind you. But, as we postpone critical debates on fiscal and tax reform, while not promoting pro-growth policies, America is becoming more and more like Europe.