(Repeats story from Sunday)
* Critics say Monti losing momentum after impressive start
* PM seen unwilling to face down parties, bond yields rise
* Labour market reform said to increase uncertainty
* ECB letter to Italy last summer largely unheeded
By Gavin Jones
ROME, April 15 (Reuters) – When Mario Monti became Italian
prime minister last November it seemed he could do no wrong.
Borrowing costs fell and praise poured in from commentators,
international bodies and political leaders on both sides of the
Atlantic.
Now the former economics professor faces falling approval
ratings, criticism of his reforms, rising bond yields and a
feeling he may not be able to revolutionise Italy after all.
Monti says his reforms of pensions, the service sector and
the labour market lay the foundations for Italy to emerge from
its record as one of the world’s most sluggish economies.
But he is increasingly isolated in that view and Italy,
along with Spain, is again at the heart of fears that the euro
zone debt crisis could worsen.
Two of Italy’s most prominent economists last week dismissed
Monti’s most recent reforms, of the service sector and the jobs
market, as missed opportunities that would not help growth.
Alberto Alesina of Harvard and Francesco Giavazzi of Milan’s
Bocconi University said in a joint article in Corriere della
Sera daily that a major overhaul of public spending was now “the
only card left to play” to improve Italy’s economic outlook.
Such criticism from academia would have been unimaginable a
few months ago, yet Monti is having to defend his record as he
comes under fire from business, the media and economists.
Monti still has many supporters, but their enthusiasm has
declined. His reforms are increasingly judged as no more than
modest steps in the right direction.
That would be fine for a normal government with a five-year
term, but it is starting to be viewed as too little for an
unelected, technocrat administration that was expected to turn
the country around in a year.
Last week Monti accused the Wall Street Journal of “snap
judgments” after the newspaper criticised his “cave-in” over
labour reform in an editorial titled “Surrender, Italian Style”.
He had watered down his original reform proposal to ensure
the backing of leftist supporters in parliament, scrapping a
plan to allow firms to fire workers for business reasons without
any risk of having to re-instate them.
The change infuriated Italy’s main business lobby,
Confindustria, whose president Emma Marcegaglia called the
revised text “very bad” and said it would do nothing to help
firms or jobs. She later said Confindustria would not try to
hijack the reform out of “a great sense of responsibility”.
Investors have also signalled they are worried. The gap
between Italian benchmark bond yields and safer German Bunds
fell to 2.8 percentage points in March from around 5.5 points
just before Monti took office.
Last week it was back up to 3.9 points, although this was
partly due to concerns about Spain.
LOSING MOMENTUM
To some extent, Monti is suffering from the unrealistic
expectations generated by his first weeks in power. Markets and
commentators were wooed by his economic competence and decisive
action on public finances, while the scandals of his predecessor
Silvio Berlusconi made him an ideal act to follow.
They were happy to overlook that as an unelected technocrat,
with broad backing in parliament but no party of his own,
lawmakers’ support was likely to wane as soon as the risk of a
Greek-style debt crisis receded.
Monti has increasingly had to come to terms with political
parties and lobbies, slowing his policy drive since he rushed
through a 30 billion euro austerity plan last year that included
pension reform.
That reform abolished early-retirement pensions based on the
number of years worked and sharply raised the retirement age for
women. It is seen as Monti’s most important achievement by far.
By contrast his subsequent “Grow-Italy” package to
deregulate the service sector and his more recent reform of
labour rules were both the product of lengthy negotiations with
parties and pressure groups. They have drawn more scepticism
than plaudits.
“Apart from pensions, on all the other fronts, from
liberalisations to the labour market, everything has remained
substantially unchanged,” said Fabio Scacciavillani, chief
economist of the Oman Investment Fund and formerly at Goldman
Sachs and the European Central Bank.
After months of silence his predecessor as economy minister,
Giulio Tremonti, attacked Monti last week, saying he was choking
the economy with “a cascade of taxes”. Despite being in Monti’s
majority in parliament, the centre-right Tremonti scorned his
“absent” privatisations and insignificant de-regulation steps.
On the other side of the political divide, the far-left
accuses Monti of being an agent for the ECB.
The central bank sent Berlusconi a letter last summer
demanding swift reforms in return for buying Italian bonds on
the market. But aside from pensions, Monti is still making very
modest progress in fulfilling the ECB’s wish list.
It wanted the budget deficit to be cut to 1 percent of
output this year “mainly by spending cuts”. Monti has a goal of
1.6 percent and two thirds of his fiscal consolidation has come
from tax hikes which ha v e deepened economic recession.
The ECB also called for “the full liberalisation of local
public services,” through “large scale privatisations”, a reform
of collective wage bargaining to tailor wages to firms’ specific
needs and a “major overhaul of the public administration to
improve business friendliness” – none of which Monti has begun.
RHETORIC
A common complaint is the gulf between his rhetoric and
actions. Critics say he convincingly explains the need for
reform only for the measures to be less sweeping than
anticipated.
Before watering down his labour reform, he said he was no
longer willing to negotiate with unions and threatened to step
down if the country was not “ready”.
“The question is not whether the country is ready, because
it has already shown that it is, the question is whether the
government is ready, because so far its reforms have not lived
up to expectations,” said Alberto Mingardi, head of the
free-market Bruno Leoni think-tank.
His service sector deregulation package aimed to cut costs
and boost competition, but its many critics said it made only
marginal changes and avoided key problem areas, such as public
utilities and banks.
The government said its liberalisation drive had only just
begun and it would present more steps every month. None have
been announced since the first package was unveiled in January.
The labour reform aims to address the “duality” of the
system, by reducing the gap between well-protected older workers
in permanent jobs and a growing army of workers on temporary
contracts with no rights or benefits.
Labour experts have applauded Monti’s goal but most said the
reform, which only affects the private sector, would have a
limited impact.
Monti has not given equal job protection to all workers or
scrapped temporary contracts, as urged by some economists,
though he raised tax on firms hiring temporary staff.
“He should have got rid of these contracts because now the
risk is that firms will pass on the higher costs of using them
to workers by cutting their wages,” said Giorgio Navaretti,
economics professor at Milan University.
And while Monti made it easier on paper for firms to fire
workers for business reasons he also increased the discretionary
powers of judges to decide whether those ruled to have been
wrongly dismissed should get compensation or their jobs back.
Monti says the reforms are complex but will lay the
foundation for increased productivity, growth and employment.
Yet analysts say the complexity is part of the problem. They
say that while one merit of the pension reform was its
simplicity, the labour reform is complicated, hard to interpret
and its results are impossible to predict.
“This reform will increase the time used up with legal
disputes over dismissals and increase the uncertainty for
companies,” said Tito Boeri, economics professor at the same
Bocconi University where Monti was rector.
(Editing by Anna Willard)
