Mr. Monti is trying to implement some economic measures based on neoclassical vision of the economy. Especially it is focused on taxes, public expenditures, labor market and welfare in general Unfortunately these measures demonstrate that he has misunderstood the causes of the crisis and it seems that he has no clue how to get out of it. Unless he changes completely his strategy there is a high probability that in few months the crisis would be worsened and Eurozone collapse would be accelerated.
What Mr. Monti says
When Mr. Monti was assigned to a position of prime minister Majority of Italians was happy because they thought that a professor of economics for sure should have clear vision of the crisis. He announced that his government has three main goals. The first is to show that Italians are able to “do homework” in terms of reduction of public expenditure, to obtain equilibrium in public balance and to recover credibility. Second is to ensure growth. Third is to be fair with citizens because in Italy there are lots of people that pay enormous amount of taxes (that often goes in the wrong directions) and another part of population that pay nothing but still receives public services.
What Mr Monti did
Despite his initial plans the first thing he tackled was labor market. Some rights of workers were lost because of Mr. Monti’s endeavor to open labor market. Anyway, labor market in Italy was “too” opened because reforms in the past 20 years forced millions of workers towards short term contracts. Nobody was assumed in consequence of this last reform. Secondly, he issued a law of “balanced budget” that became part of the Constitution. That implies constant reduction of public expenditure year by year because Italy is paying an increasing amount of interests on debt. If interest rate goes up than Italy will have to cut expenditures on transfers to regions and in following sectors: education, healthcare, courts and so on. But this kind of cuts certainly will generate reduction in consumption, GDP and also will determine social instability. If GDP declines we will need carry out more cuts to make our debt sustainable and this process repeats again and again. Thirdly, Mr. Monti has issued a law for public insurance of banks against the risk of bankruptcy. Now Italian banks are purchasing debts of State with funds from BCE (to 1% of interest rate). Banks will receive from 5% to 7% of interest rate from the State. In practice the State do not receive money directly from BCE but has to pay this money with 5% per year to Italian banks. GDP of Italy is increasing by zero % per year, this means that the State has to reduce public expenditure (again) or has to sell its property (like buildings, lakes, islands, etc.). These are the main reasons why our debts are increasing in spite of cuts. Eventually if some banks collapse, the State will have to pay for it. This is what is happening.
What Mr. Monti could not do
Since the Prime Minister was a follower of neoclassical rules everyone have been expected that he would be able to “open” markets inside of Italy. In this field he failed completely. His government is supported by Berlusconi’s party, historic enemy of all kinds of liberalization because he is an owner of the enterprises in many of economic sectors that are closed to the market competition (insurance, banks and mass media). Mr. Berlusconi could not vote in parliament against himself. The lobbies have won easily and all the Italian markets are blocked equally as before the government of Mr. Monti was established. Also all Italians are still waiting for someone who can propose real solutions for the problems in our economy. Corruption, inefficiency of justice, criminal organizations, inefficiency of bureaucracy are the most important factors that are pushing investors away from us. Not a single law passed by the government was able to mitigate the problem. Only equilibrium of balance itself is not sufficient to promote foreign investments; it is just one of the essential conditions. There should be favorable conditions for investors. Actually the environment in Italy is not that attractive in this sense. Also in all of his speeches the Prime Minister mentions that economic growth is important, but he cannot spend any amount of money if BCE and EU policies are not changed because in these conditions of public balance, the debt will grow.
Mr. Monti’s government could fulfill only first commitment of his program i.e. recover international credibility that was damaged after Mr. Berlusconi’s office period. Except for that other directions taken by the government were wrong and did not tackle real problems of Italian system. Economic policy driven by Mr. Monti is recessive and it is somehow impacted on increase of public debt. Some economic policies that could have increased attractiveness of Italy were not implemented because the government is too weak in respect to parties that vote for a law in parliament. Unless different line of economic policy is taken, Mr. Monti’s government will be remembered as failure that led to decline of Italy and Eurozone in general.