December 6, 2011

Monti’s “Save Italy” Decree: Stay Tuned, It’s Just the Beginning

Mario Monti has called it the “Save Italy” decree, and the markets liked it (the spread over safe-haven German debt securities fell below 400 basis points for the first time in more than a month). It’s a €30 billion package—€12-13 billion in cuts to public-sector spending, and €17-18 billion in new taxes—which includes a two-percentage-point hike in the value-added tax rate (IVA) to 23%, the reinstatement of a property tax repealed in 2008, a 1.5% tax on income repatriated under the so-called “tax shield” amnesty program, tax incentives for businesses that hire women and young people, and an increase in the retirement age (to 62 for women and 66 for men, from 60 and 65, respectively). But the nastiest surprise—la carognata (roughly translated in English as “a really lousy thing to do”), as Italian economic journalist and commentator Oscar Giannino called it—was that only the minimum pensions (up to about €950 a month) will be protected from inflation in 2012 and 2013. That’s also why, by the way, at a press conference the welfare minister, Elsa Fornero, was overcome by emotion as she announced the decision.

Elsa Fornero's crying
And, well, I actually think her weeping was genuine, et pour cause if we think of the effect that could have on some of the most vulnerable members of Italian society—and to think that, as some commentators observed, it could have been enough to raise the tax on income repatriated from 1.5% to 2% to obtain the same effect! Yet, the markets agreed with Super Mario, and that’s no small thing.

Furthermore, to see the glass half full, besides the overdue increase in the retirement age, the “Save Italy” decree did not include a one-off wealth tax, nor did it raise the top rate of income tax (IRPEF).

Overall, however, there are two main criticisms to Monti’s decree: the first is about the package’s heavy reliance on tax increases (“Mr. Monti’s measures are long on tax hikes and short on serious reform,” and they “merely reflect a familiar Brussels mindset that values short-term tax revenue over long-term prosperity,” as the WSJ puts it); the second is that, despite the Prime minister’s promises of fairness, too much is being loaded on to the poor.

Admittedly, both criticisms are well-founded, but, at the same time, they are possibly too severe and too hurried. In fact, as to the first criticism, Mario Monti replied in a press conference with the foreign media that he understood concerns that the austerity package may worsen the recession. But then again, he added, “We need to think about what Italy would be without this package. […] Our package is very different from others this year. […] Without this package we believe Italy will collapse, Italy will become like Greece, a country for which we have a lot of sympathy but which we do not want to become.” Well, I think he is quite right: this is just an emergency decree, the first step in a long process, as he himself has repeatedly stressed, and, perhaps, the best of “Monti’s method” is yet to come.

However, one thing is certain: According to Reuters, Mario Monti’s new approach and “special relationship” with the foreign press is the biggest news:

If any reminder was needed that the fate of Italy lies outside the country, it was Prime Minister Mario Monti's decision to hold a highly unusual separate news conference for foreign reporters on Monday to explain his economic programme.
Monti, the respected head of a technocrat "Save Italy" government, impressed investors with a 30-billion euro package of painful and rigorous austerity measures unveiled on Sunday.
Italian bond yields, which had flirted last week with eye-popping rates above 7 percent, dropped back almost a full percentage point on Monday.
But it was difficult to separate the impact of Monti's measures from a broader mood of optimism that euro zone leaders may finally have summoned enough resolve to provide a concerted plan to restore investor confidence in the euro at a summit at the end of this week.
All along, much of Italy's fate has remained outside the control of Monti despite the sighs of relief that met his appointment last month after mounting exasperation over the antics of his billionaire predecessor Silvio Berlusconi.
So Monti's decision to hold a long and detailed news conference on Monday for the foreign press before he presents his measures to parliament was astute.
He knows they play a vital role in the crucial foreign perception of whether Italy can fight the two-headed dragon of huge debt and a decade of almost stationary growth.
In a clear drive to win over the foreign reporters, Monti said he had brought forward his cabinet meeting by a day specifically so he could talk to the foreign media on Monday before going before parliament.
He also emphasised that he was speaking to them before his scheduled appearance on Tuesday night on one of Italy's most watched television programmes to explain his austerity package to the nation.
In Monday's news conference, Monti said his government intended to set up special structures for dealing with foreign journalists, who have been deeply frustrated for decades by the reluctance of Italian officials to give out information.
Official spokesmen are reluctant to be quoted in anything but the vaguest terms, even when the inquiry is mundane.
Whatever the new prime minister's motives, his change of style compared with the scandal-plagued and flamboyant Berlusconi was clearly appreciated.
Some members of the foreign press, many of whom felt ignored by Berlusconi and reciprocated with scathing coverage, were so happy to have a prime minister visit their association in Rome that they broke into respectful applause when Monti entered and left the room.

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