Monti Uses Summit Success to Push Italy Overhaul

Italian Prime Minister Mario Monti is trying to parlay his success last week in winning concessions from European partners to shore up the country’s debt and bolster efforts to revive the domestic economy.

Monti’s government plans to approve as soon as today more than 4 billion euros ($5 billion) of spending cuts this year to trim the size of the public administration and stave off further tax increases. The initiative marks a renewed effort by Monti to boost growth and competitiveness before his term ends in April.

The expense reductions come after German Chancellor Angela Merkel was persuaded at a June 28-29 meeting of euro-area leaders to allow the region’s bailout funds to be used more flexibly to help nations like Italy and Spain reverse surging borrowing costs. Italy’s 10-year bond yield has fallen 37 basis points to 5.83 percent since the meeting and Monti’s approval rating rose in the first opinion poll since the summit in Brussels.

“Monti will try to use his renewed strength to sell his reforms at home,” said Mario Spreafico, who manages 1.5 billion euros as chief investment officer at Schroders Private Banking for Italy in Milan. “It’s important for him to keep an active role in the European scene. Being incisive on the domestic side doesn’t count that much when your spread is sinking the real economy just because Italy is mistakenly compared to Spain.”

At the meeting, Monti threatened to scuttle a 120 billion- euro plan for growth favored by Merkel without concessions on granting more flexibility to the region’s rescue funds to buy bonds of countries completing their deficit pledges. Merkel eventually agreed to language supporting Monti’s so-called spread shield that seeks to bring down borrowing costs for countries meeting their fiscal commitments.

Italian newspapers compared Monti’s performance to that of Mario Balotelli, the Italian soccer player who scored two goals to beat Germany in the European Cup semi-final. The game took place on June 28 when European leaders were well into a 13-hour marathon meeting to find ways to contain the debt crisis.

In the run-up to the meeting, Italy’s 10-year bond yield climbed to more than 6 percent after Spain requested aid for its ailing banks on June 9, fueling concern Italy would be next. The jump in rates occurred even as Italy was working to bring down this year’s deficit to within the EU’s 3 percent of gross domestic product ceiling. The government will have a so-called primary surplus to reduce the debt level in 2013.

The post-summit drop in yields will ease financing costs for a country that needs to sell about 35 billion euros of debt per month on average. The outcome of the meeting also eased unrest among supporters of Monti’s unelected government, some of whom had raised the possibility of early elections unless the premier secured backing in Brussels.

“The positive outcome put an end to the tiresome debate over the duration of the government,” Franco Marini, a senator for the Democratic Party that backs Monti, said on July 3 after Monti testified to Parliament. “The tough situation of our economy imposes upon the government and the majority supporting it an extraordinary commitment until the end of the legislature to stop the recession and support a recovery.”

Monti is now trying to renew efforts to revamp an economy burdened by the euro-region’s second-biggest debt and where growth has trailed the euro-area average for more than a decade.

Upon being appointed to replace Silvio Berlusconi in November, Monti passed an overhaul of the pension system, a 20 billion- euro austerity package to shore up public finances and a plan to boost competitiveness by opening up closed professions.

The premier then moved to overhaul the labor market by expanding unemployment benefits and easing rules around the termination of workers. Opposition from unions and the Democratic Party forced Monti to water down changes to firing rules, prompting criticism that his reform agenda had stalled.

To show European allies he could still deliver, he called confidence votes on the labor market plan to get parliament to approve it a day before the start of the summit.

Monti is keeping up the pressure by passing the spending review by decree, meaning it will take effect immediately even before parliament votes on it. The multi-year plan will cut transfers to regional governments, limit the scope of the public health-care system, reduce the size of the civil service, and force government ministries to scale back spending.

More than 200,000 civil servants and regional officials may eventually lose their jobs and hundreds of hospitals will be shut, Corriere della Sera reported today.

Part of the savings will be used to put off a planned increase in the value-added tax due in October as the government seeks to avoid further damping consumer demand with Italy mired in its fourth recession since 2001.

Monti has opposition from Italy’s two biggest unions, which have threatened to strike. Democratic Party leader Pier Luigi Bersani has said touching health-care and education spending would be unacceptable.

With nine months left in his term, Monti should focus on curtailing “tax havens, the spending review and the growth plan,” said Peter Ceretti, an analyst at Eurasia Group in New York. “These are the fronts where the Monti’s government can make some progress.”

Monti also needs to do more in terms of selling state-owned assets, Ceretti said. The government has direct stakes worth about 10 billion euros in Eni SpA and Enel SpA, the country’s two biggest energy companies, and controls real estate that the previous government estimated at more 300 billion euros.

“We don’t think last week’s EU summit was a game- changer,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “Some progress was made, and European leaders showed their readiness to compromise, but the bigger picture remains broadly unchanged: Growth is collapsing, particularly in the south, and the bailout funds aren’t big enough to cope should stress intensify.”

Source: Bloomberg