Nightmare in Rome

Alexander Privitera

AGI Non-Resident Senior Fellow

Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.

For observers in the US, the Italian crisis could be perceived as a cautionary tale. It is a story of how democratically-elected politicians can jeopardize the future of their own country by focusing entirely on their own narrow self-interests. This very week, while Mario Monti − the man appointed to enact a series of painful reforms in Italy − tries to put together a new government in Rome, in Washington, the so-called super committee is frantically trying to forge a deal to address the fiscal problems of the US. Many observers have already labeled the committee’s work as a pantomime, focused more on the upcoming elections than on America’s debt. Others have pointed out that the US is, in some ways, in an enviable position: if it were to suddenly face a sovereign debt crisis, the Federal Reserve Bank (FED) would never allow the country to default and would act as a lender of last resort. But this confidence is misplaced and bears elements of hubris. While it is true that the institutional framework in the US allows for a much more streamlined decision process, when the institutional pipes are seriously clogged, they will face serious plumbing problems, regardless of how simply built they are.

It is true that managing seventeen members of the euro zone in a crisis of this magnitude is very complicated. It is also true, though, that the euro zone is not standing still. The crisis in Europe has already had the effect of removing some of those governments which were perceived as an impediment to finding solutions. Italy’s former Prime Minister Silvio Berlusconi is the latest, and probably best, example. He, more than anybody else, had become part of the problem. He is now gone.

Looking for a New Leader
It is now up to former European Commissioner Mario Monti to form a government tasked with painful reforms. Speaking before reporters on Monday, Monti promised sacrifices for all, but he stopped short of promising “tears and blood.” Speaking in the German capital of Berlin last Wednesday, the widely respected Monti set the tone of what would come with his leadership. He made it clear that Italy needs more growth, “not through more borrowing, but through the removal of impediments to growth.” He went on to underline that “growth requires structural reforms in the form of taking away privileges and rents from practically every category in society.” While his words were well received by financial markets and European partners, Monti is well aware that to implement such reforms in Italy will be a tough task.

His government will need not only a group of capable experts, but also wide political support in parliament. For many politicians, the temptation − a trap so well described by the writer Giuseppe Tomasi de Lampedusa in “The Leopard” − will be to agree to change everything on the surface, only in order to make sure that nothing changes in reality.

Mired in byzantine power struggles, the Italian political class, on both sides of the isle, is under-equipped for today’s challenges. Expecting change from the very same politicians that think their main purpose is not to give, but to take from their citizens, requires a lot of optimism. Furthermore, the political atmosphere has been deeply divisive for decades, which makes it hard to find a middle ground with the ability to agree on a program of reforms.

For seventeen years, Berlusconi has kept the country under his spell. The Italian left has demonized him as the source of all Italy’s problems. According to them, the simple solution was to remove the billionaire turned politician from power, once and for all. Only then could Italy get back on track. The right, too, has kept its focus firmly on Berlusconi. Its members knew he was the glue that kept their splintered coalition together.

Berlusconi’s Political Legacy
Silvio Berlusconi, the media mogul, moved into the political arena in 1994. He successfully marketed himself as the outsider, the self made man that would propel the country into a new phase of freedom and prosperity for all. But soon, the agent of change turned out to be the defender of the status quo.

Most Italians, who have become skeptical of real change and are used to settling for what they perceive as the lesser of two evils, continued to support him. There was never any alternative to Berlusconi that really convinced them.

Now that the Berlusconi era is finally over, tellingly crushed by the markets and the European Union (EU), rather than by Italian voters, both political sides find themselves orphans of a dominant, albeit often despised father figure. Deep cracks are already starting to appear, both on the left and on the right of the political spectrum. According to people close to Berlusconi’s party, the PDL (Party Of freedom) is already, as the Italian phrase goes, “split like an apple”. Its members are not sure whether to push for early elections, or to endorse a government of national unity instead. Some are worried that their political careers could soon be over. Berlusconi’s traditional ally and coalition partner, the Northern League − a party that once dreamed of a secession of the rich north from Rome and the poorer south − has already made its choice: it will oppose a government of national unity lead by an outsider and join the ranks of the opposition. For the left, too, the picture is certainly not one of harmony.

The political confusion was to be expected. Still, the question stands: can a government of technocrats overhaul an entire country?

Lost Decades
The current crisis has been long in the making, and Berlusconi is not the only cause. It is the result of a widespread political culture that leads to particularly heavy tax and regulatory burdens for those who play by the rules. Of course, many Italians have found ways to dodge them, often with the help of the same politicians that crafted these very rules.

It will therefore be a tough task to dismantle a system and a political culture that developed over decades. What the 75 year old Berlusconi leaves behind is a country of old people, which favors the older generations. In fact, overhauling the pension system was one of the main stumbling blocks that led to the downfall of Berlusconi.

The labor market is based on a two-tier system, made up of those who are protected and those who survive on badly paid short-term employment. The younger generation is stuck in the second tier, with little chance of advancement. The Italian President of the European Central Bank, Mario Draghi, even talks of the dangers of a lost generation. Labor market distortions are also a factor in the steady decline in productivity. Car maker Fiat, the industrial symbol of Italy, has outsourced most of its production abroad, citing the lack of competitiveness of its own Italian workers. Direct foreign investment, too, is low for a country as developed as Italy. Resorting to a government composed of technocrats is probably the best a broken political system can do, but it might not be enough.

So-called governments of national unity, lead by technocrats, are nothing new in Rome. In fact, they are the default solution when times are tough. Political outsiders impose short-term hardship without suffering the political consequences. However, these governments do not last. Professional politicians will support them only for a limited time period. When they think the worst is over, they reclaim the driver’s seat as soon as they possibly can. Thus, the country typically reverts to its old, bad habits. We have seen it played out before.

Why Limited Sovereignty Could be the Answer
This time around, a short-term government just won’t do. The deep structural reforms that Italy desperately needs can only be successfully brought about with a sustained effort and a long-term commitment by its political forces. The so-called stability package, which the Italian parliament is currently voting on, only represents half of the story − much more is needed. European Commissioner Olli Rehn has already demanded that Rome take further, more decisive steps.

The markets, along with the EU and the International Monetary Fund (IMF), will therefore need to be vigilant for some time to come, well beyond the life span of the next government. While it is a hard pill to swallow for a country as big as Italy, this is the new Europe of shared sovereignty. Countries submit their budgets to the European Union for approval and are monitored closely by Brussels when they implement their fiscal policies. Italy is the real test for this new approach, one that will probably be extended to all member states of the euro zone over time. For now, the main task is to prevent Rome from falling. Otherwise, the fire will certainly reach Paris, and that would be the death knell for the euro and for the European project. In an impassioned speech during a party convention on Monday, German Chancellor Angela Merkel urged Christina Democrats to understand that “we live in times of epic change”. She once again called for more, not less Europe. Merkel is trying to prepare her country for more unconventional steps. She concluded by saying that “we don’t whine, we don’t complain. We know instead that we have a job to do.”

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.