Italy's designated premier, Mario Monti, must move quickly on economic reforms to calm financial markets. He and the Italian people have perhaps only days to signal their willingness to fundamentally change. At stake: their country, the euro, and the global economy.
Italy has a nearly 3,000-year history of violent and costly attempts at cohesion. Now, its people must take unity to a totally new level, coming together over painful reforms that will make or break the world’s eighth-largest economy – and the euro currency that holds much of Europe together.
The Nov. 12 resignation of Italian Prime Minister Silvio Berlusconi gives the country the opportunity to defy its history. The designated premier, Mario Monti, is a respected, Yale-educated economist, whose support for substantial reforms is an encouraging sign after 17 years of chaotic rule under Mr. Berlusconi.
But a daunting number of things will need to go right – and quickly – for Professor Monti to save the country.
First, a new Italian government must instill confidence within bond markets that it can actually meet its debt payments. Italy needs over $400 billion in external financing next year alone to cover its projected spending. By comparison, Greece’s much smaller economy has a projected budget shortfall of about $20 billion.
Rome has to get this financing either from the bond market, or from bailouts by other governments and the International Monetary Fund. Yesterday marked the first test of the market’s willingness to lend to post-Berlusconi Italy. The government was able to sell over $4 billion in bonds, but at a significantly higher cost in interest rates than previous bond sales.
Market confidence could be strengthened if the new caretaker government in Rome quickly implements a package of budget cuts and reforms that the Italian Senate passed on Nov. 12. This mix of spending cutbacks, changes to labor laws, and efforts to streamline government regulation is a recipe of “orthodox” reforms that many Latin American and Asian economies implemented in the 1980s and 1990s. What the approach lacks in originality it makes up for in proven success.