Very few policy-makers in Europe would want to swap places with Italian Prime Minister Mario Monti at the present time.
Parachuted in by European leaders as the head of a technocratic government in the hope of putting Italy back on financial track, Monti has been thwarted by deeply entrenched and powerful domestic political interests. Despite months of negotiations with the major unions, Monti has been unable to get them to budge on much-needed labour reforms such as easing restrictions on the firing of workers and discouraging the use of temporary employment contacts. The legislation is still being debated extensively inside Italy’s parliament. Monti is now being roundly castigated for implementing a significant austerity package that imposed EUR 24bn in new taxes this year alone. With the economy back in a very deep recession and unemployment soaring to almost 10%, his approval rating has plummeted from 71% when he took office back in November to just 33% currently (according to polling agency SWG).
Interestingly, European policy officials are also becoming increasingly frustrated with Monti. Some apparently are annoyed that he has not achieved more at home, believing that he has been too absorbed with attempting to rectify Europe’s financial issues rather than getting his hands dirty domestically. Moreover, Germany has become exasperated with some of his recent opinions and proposals – he threw significant weight behind Francois Hollande’s growth-push and he supports the idea of Europe’s bailout funds being authorised to purchase the bonds of troubled sovereigns such as Spain and Italy.
His loss of local support has now reached the point where the main political parties are agitating for his removal and for fresh elections to be called. At this incredibly sensitive time for Italy, this prospect is no doubt contributing to the unease being felt by both traders and investors. Italy remains Europe’s largest sovereign borrower by some distance, with almost EUR 2trln of debt outstanding. Over the second half of this year, more than EUR 200bn of that needs to be rolled over, a massive challenge in the current environment, and very expensive at current yields.
Just like Spain, it would be no surprise if Italy fell into the hands of international creditors before too long. Italy’s debt mountain dwarfs that of Spain by a ratio of 5:2, so an Italian rescue would really stretch international financial resources to the limit.