The European sovereign debt crisis reached its apex when global financial markets began considering the possibility that a large euro zone economy — Italy, Spain, or both — could become another Greece, resulting in the dissolution of the single currency. By November 2011, the spread between the yields of 10-year Italian and German bonds was so great that Italy had to pay interest rates well above 7 percent on its long-term debt, a clearly unsustainable level. This marked a political turning point. But while Italy was once seen as a primary cause of the euro crisis, it could now be poised to be part of the solution.
As Italy witnessed the demise of the Silvio Berlusconi government — the result of pressure from international markets, European partners, and the Italian media — it was Italian President Giorgio Napolitano who orchestrated what has been called one of the most complex political transfers in Italian postwar history. Napolitano spent months laying the groundwork for an alternate government and consulted with Italian politicians, European leaders, and U.S. officials. The current cabinet is now one of the most technocratic in Europe and enjoys one of the largest parliamentary majorities in Italian history.
In a short time, the new government under Mario Monti has introduced drastic economic policy changes and has had both houses of the legislature approve them. As a consequence, Italy, which already had one of the lowest public sector deficits, one of the largest primary surpluses, and one of the lowest levels of overall debt (combining public, household, and corporate debt) in Europe, is one of the few Western countries likely to achieve a balanced budget by 2013 and preserve it over the near future. This is due, above all, to recent reforms to its pension system, which have transformed it into one of the more sustainable in Europe. Even with moderate 3 percent nominal growth and 5 percent yields on bonds, a primary surplus at the level forecast for 2012 would, in a decade, substantially erode Italy’s enormous public debt.
Nonetheless, anemic economic growth has been the primary problem facing Italy over the last decade. Although the Monti government began its tenure by balancing the budget through cuts and taxes, the second phase of its agenda focuses on improving economic growth, via a vast array of deregulation and liberalization measures. The next major step, to be completed by the end of March, will be the introduction of labor market reforms to make it more flexible and open. More growth-oriented measures are likely to be implemented over the coming months, while efforts against tax evasion have intensified. The overall impact on GDP growth is likely to be negative in the short term, but the improved competitive framework resulting from these measures should help to spur growth by the end of 2012.
Italy’s economic prospects also depend heavily on further policy changes at the European level. Having done his homework, and — unlike Berlusconi — enjoying an excellent international reputation, Monti has brought Italy back to the role of a credible actor on the EU scene. He has tried to influence the agenda by shifting the emphasis from an exclusive focus on austerity to more growth-oriented policies. Another Italian, President of the European Central Bank Mario Draghi (he and Monti are often referred to as the “Super Mario Brothers”), has also played an important role in providing essential support to the EU banking system, with his understated tones masking what is, according to most commentators, an aggressive manner. And the Italian government and public opinion have also always been one of the most supportive among EU members of a true political union, which German Chancellor Angela Merkel has identified as the ultimate goal of the institution.
While a technocratic leadership, swift budget balancing, growth-inducing policies, and leadership within the EU do not comprise a complete answer to the crisis, they give many reasons to be hopeful. But it is quite a turnaround for the “sick man of Europe,” as The Economist recently called Italy, to be seen not only as convalescing, but as a potential contributor to healing the continent.
Maria Elena Gutierrez is the representative of the German Marshall Fund of the United States in Turin, Italy.