We’ve got a piece in City AM today, looking at the potential spillover from Spain to Italy, particularly in light of the increasingly worrying political situation there. By all accounts it seems that technocratic Italian Prime Minister Mario Monti has slightly lost touch with domestic issues in search of a grand eurozone solution.
See below for the full piece:
SPAIN’S €100bn bailout plan has failed to reassure markets. The permanent fear of contagion means nervous glances are once again being directed at Italy. Austria’s Finance Minister Maria Fekter was the first political leader to claim that Italy may have to tap into the Eurozone’s rescue funds – a statement which did not go down well in Rome.
Since entering office last November, Italy’s Prime Minister Mario Monti, and his cabinet of technocrats, have done more to reform the country’s stagnating economy than almost any previous government over the last few decades.
However, Monti has recently become more concerned with convincing Germany and others to go ahead with grand plans for a political union in the Eurozone – Eurobonds and a banking union – than completing crucial domestic reforms. Worryingly, the pace of reform has slowed down, even though there are no shortage of items on the Italian government’s to-do list – including plans to increase labour market flexibility in the public sector, a comprehensive anti-corruption bill and, ideally, a new electoral law to be adopted ahead of the next general elections in 2013.
There’s a lesson here: the loss of momentum in Italy’s reform programme perfectly summarises why, beyond the pro-integration rhetoric, Germany remains so wary of a political union in which Berlin joins liabilities with Athens, Madrid or Rome – from Eurobonds to a single bank resolution fund. From the government to the media, Germans are simply too concerned that Club Med countries would see risk-pooling in the Eurozone as an excuse to delay the necessary reforms and give in to the temptation to fund growth via more debt – which is what put them in the current mess.
But there’s another reason why Monti should focus more of his attention on the home front. Recent polls show that support for the Italian Prime Minister is at its lowest since he took office, and the political parties that back him in parliament are also struggling. Voters have had their heads turned by a rather unlikely alternative – the so-called Five Star movement, led by the comedian Beppe Grillo.
A political maverick, Grillo has mainly been campaigning for a clean-up of Italian politics. But he has also suggested that Italy should consider dropping the euro while still remaining a member of the EU, and write off at least part of its gigantic public debt. Despite having very little cash to fund its campaign, the Five Star movement did incredibly well in the latest mayoral elections, and is polling at 20 per cent – leading Silvio Berlusconi’s People of Freedom party by several percentage points.
Instead of planning new grand European projects, Monti should re-focus his attention on the domestic reform programme. This is not the time to have your head in the EU clouds. As the rise of Beppe the comedian illustrates, public support for the euro in Italy can no longer be taken for granted.