To be sure, austerity alone cannot enable Italy to escape its debt trap. But debtor countries like Italy have little fiscal room for stimulus. That has to come from the creditors in Europe, namely Germany. Yet, there too, Chancellor Angela Merkel risks political failure in German elections next fall if she would agree to a stimulus program or a “bailout” of the debtor countries. In Germany, too, the short-term horizon of voters blocks a long-term solution to Europe’s collective woes.
Monti’s “circuit breaker” policies are a battle against two forces: the “Diet Coke culture” of consumer democracy and the “vetocracy.” In a consumer democracy, all the feedback signals – the media, market, and politics – steer behavior toward immediate gratification. Just as people expect sweetness without calories, they seem to want consumption without savings, high standards of living without a competitive economy, and a welfare state without taxes.
Vetocracy is a decayed form of democracy in which special interests – from unions to banks – have staked a claim on the state and seek to block any reform that threatens their spoils. In Italy, such special interests even have so-called “acquired rights.” To satisfy such appetites, debt as a percent of GDP in Italy soared from 60 percent in 1980 to 120 percent by 1992.