December 21st, 2012
02:53 PM ET

Italy in 2013: Will the patient have a relapse?

This is the latest in a series of entries looking at what we can expect in 2013. Each weekday, a guest analyst will look at the key challenges facing a selected country – and what next year might hold in store.

By Alberto Saravalle, Special to CNN

Editor’s note: Alberto Saravalle, a member of Fermare il Declino, is a professor of European Union Law at the University of Padua, and managing partner of a law firm in Milan. The views expressed are the author’s own.

Just as the rest of the world was beginning to have some confidence in Italy’s ability to overcome its structural problems, the goodwill generated under Prime Minister Mario Monti could be about to vanish.

Italy is once again in the Eurozone hot seat, leaving observers with four key questions about Italy and its prospects for 2013: What happened? What happens next? Should we be worried? And what does the government plan to do?

What happened? After the ruinous finale of Silvio Berlusconi’s last government, a Grosse Koalition comprised of the main political parties reluctantly supported a technocratic government led by Monti. Although not all expectations for the new government have been fulfilled, enough was done to restore Italy’s credibility.

But Berlusconi’s sudden announcement that he intended to compete in next year’s election as leader of the Freedom Party (PDL) shocked even his most ardent (and blinkered) opponents. And if this wasn’t enough, he also withdrew his party’s support of the government, prompting Monti to announce that he would resign after the budget law is adopted. That time has come, and tonight he will be presenting his resignation to President Napolitano.

What next? The biggest variable is what Monti will decide to do. He is being asked to run as the leader of a coalition of centrist movements that see him as the only way to avoid (or at least limit) the otherwise inevitable victory of the Democratic Party (PD) and its allies. Indeed, even Berlusconi suggested that he might step down if Monti were to lead the moderates.

But the pressure on Monti is not just coming from within Italy – European leaders need assurance that Italy will continue on the path of reform and be a reliable partner that can help further integration in the EU (beginning with the Banking Union). It is revealing that Monti recently flew to Brussels to attend a meeting of the European People’s Party.

Looking forward there seems to be three potential scenarios.

The first is that the moderate PD and its allies secure a “relative majority” that, according to the electoral law, grants them “premium seats” in parliament and therefore a slim parliamentary majority. The old guard prevailed in the PD primaries, meaning Italian politics missed a big opportunity for a much-needed breath of fresh air. Now, it looks like PD Secretary Pierluigi Bersani could be appointed prime minister, and he would head a weak leftist government with a Hollande-style political platform. Monti would be elected president to reassure European partners and financial markets of Italy’s commitment to continuing its structural reforms.

The second possibility is that one or more centrist movements (including, Christian Democrats and former allies of Berlusconi or the newcomer Fermare il Declino, led by the well-known journalist Oscar Giannino and inspired by the economic recipes of Chicago’s Booth School of Business Professor Luigi Zingales) would secure a breakthrough, forcing the PD to seek their support to ensure a stronger government. Much depends on whether Monti will agree to be the designated leader of this coalition. If he does and the coalition is successful, he could return as prime minister. However, in entering the race he would put at stake his credibility as a pure technocrat and might no longer be viewed as a suitable candidate to be President. Otherwise, it is likely that Bersani will end up leading the country, although the centrists would choose a minister of the economy with a solid international reputation and credibility. Under this second scenario, Monti could still be picked as president.

The third possibility is that the parliament is left fragmented, with many voters abstaining. The only possible solution would be another large coalition, with Monti as premier.

Should we be worried? Clearly, the first and third scenarios would be destined to create instability. Regardless, though, it is unlikely that the EU would allow any new government to diverge substantially from its current policies. The real risk for Italy is not Berlusconi’s return, which is quite unrealistic. Rather, the question is whether the country will be able to move rapidly on the path towards growth. This is more doubtful. Only a strong government with a clear mandate from the voters will be able to introduce the necessary but painful reforms needed to revamp Italy’s stagnant economy after almost two decades of Berlusconi in power. The risk is that an uncertain political future will prompt the markets to question Italy’s reliability and the country’s bonds will again come under attack.

The next government’s agenda After 13 months of austerity and new taxes, Italy needs a jolt to its economy. Tough decisions await any new government; including how best to reduce the public deficit (public debt is currently 121 percent of GDP). Cutting taxes should be a priority to stimulate the economy, but structural reforms are also necessary, including for the labor market – there are currently more than 9 million people on short-term contracts, while Italy also has one of the highest rates of unemployment among young people and women. In addition, a bold policy of privatization (often announced, but not followed through properly) and liberalization should be rapidly implemented.

Italy is a rapidly aging country with no upward mobility, little investment in R&D, a flawed education system that does not promote meritocracy and an inefficient justice system. To secure the consensus necessary to enforce these reforms, the new government must dramatically cut profligate spending by politicians and tackle corruption head on.

A few years ago, The Economist referred to Italy as “the sick man of Europe.” Many hoped, prematurely as it turns out, that a few months of Monti would be enough to cure the patient. That hasn’t been enough. But one thing is sure – a complete relapse of this patient could prove fatal.

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Topics: 2013: What's Next? • Italy

soundoff (12 Responses)
  1. The Restless Rani

    Reblogged this on The Restless Rani.

    December 21, 2012 at 3:03 pm | Reply
  2. Quigley

    Will Italy relapse economically? Quite likely as long as Italy remains in the Eurozone.

    December 22, 2012 at 1:56 pm | Reply
  3. j. von hettlingen

    The biggest challenge Italy has to deal with, is its people. Fickle and self-centred, many lack civil spirit and the concept of common good. They vote for those, who suit their interests. Politicians dip their fingers into the country's till and don't care what the prosterity thinks about them. Ordinary citizens don't have a moral instance to look up to. Monti is one of the few politicians with an impeccable record of ethical behaviour.

    December 24, 2012 at 12:46 pm | Reply
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