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Monti's reform path faces test beyond Italy elections

Italy's outgoing Prime Minister Mario Monti looks on during a news conference in Rome December 28, 2012. Monti said on Friday that he would
Italy's outgoing Prime Minister Mario Monti looks on during a news conference in Rome December 28, 2012. Monti said on Friday that he would

By James Mackenzie

ROME (Reuters) - Mario Monti declared "mission accomplished" when he resigned as Italy's prime minister, having seen off the debt crisis that loomed as he took office just over a year ago but 2013 will test whether he has laid the foundations for lasting economic change.

Elections on February 24-25 will give Italian voters their first chance to decide whether they want to stick to the broad course he has set or turn to a growing chorus of politicians who have attacked his austerity medicine.

Monti's decision to enter the race himself has put his reform agenda at the heart of the campaign and will have effects far outside Italy, the euro zone's third-largest economy, which took the single currency to the brink of collapse last year.

Former European Commissioner Monti, favored by the markets, the business establishment and even the Catholic church, has insisted that the election must be about creating agreement on policy rather than on any individual.

In that sense, the true test of his success may be not whether he wins a second term but whether he has succeeded in convincing the other parties and the country as a whole to stay with the liberalizing agenda he has laid out.

That remains uncertain, despite the plaudits he earned abroad for his handling of the crisis, as ordinary Italians have seen their living standards fall and unemployment rise relentlessly.

The centre-left Democratic Party (PD), the favorites to win the election, have supported Monti in parliament and say they will maintain the broad course he has set, while putting more emphasis on growth and helping workers and the poor.

But some on the left of the party and among its trade union allies say inequality has risen under Monti.

On the right, Silvio Berlusconi accuses Monti of taking orders from German Chancellor Angela Merkel and penalizing middle class Italians for the benefit of German banks. He has called for sweeping tax cuts to stimulate growth.

The runaway success of the anti-establishment comic Beppe Grillo and his 5-Star Movement, which wants to hold a referendum to decide whether to leave the euro, has also underlined the widespread mood of disillusion now deeply anchored in Italy.

"I don't have any confidence in my country, absolutely not," said Rosaria Resciniti, one of thousands of young people lining up to enter a competition for a job as primary school teacher in Rome.

"It is a country for old people. We should all leave and leave the country to the pensioners," she said.

UNEMPLOYMENT EMERGENCY

Monti himself acknowledged the disaffection on Friday when he confirmed that he would be joining the election campaign as head of a centrist alliance committed to continuing his reforms.

"Fortunately, it seems that the financial emergency is over, but there is another emergency which is just as serious or even more so, which is the unemployment emergency, especially as regards youth unemployment and the lack of growth," he said.

Helped by the promise of European Central Bank support, the main gauge of investor confidence, the spread between yields on Italian 10 year government bonds and safer German Bunds has narrowed from the crisis levels of more than 550 basis points hit when Monti took office to about 320 points.

But the broader indicators of economic health have got worse, a fact constantly pointed out by critics such as Berlusconi and Grillo, who say the tax hikes and spending cuts imposed to calm the markets have dragged Italy into a recessionary spiral.

The economy has contracted for five consecutive quarters and is estimated to have shrunk by 2.4 percent in 2012. Public debt has topped the symbolic 2 trillion euro level, corruption and waste are still rampant, and youth unemployment is over 36 percent.

Italy has had the euro zone's most sluggish economy for more than a decade, and whether any of the leaders fighting the election can turn that around quickly is doubtful, as one of the possible ministers in a centre-left government acknowledged.

"This crisis will last throughout the whole of the next parliament at least," deputy PD leader Enrico Letta told Reuters last month.

The task will be greatly complicated if market sentiment turns against Italy as it did in 2011, when tensions in the Berlusconi government raised doubts about its commitment to budget discipline.

Monti, seen outside Italy at least as a guarantor of stability, has said he was "not a man sent by Providence", but whether he himself will be involved in the next government has been one of the main questions hanging over the race.

His sober, professorial style came as a welcome relief to international investors and European partners unnerved by the turmoil and scandal surrounding Berlusconi as bond markets crashed in the summer of 2011.

But if opinion polls are confirmed on election day, it is difficult to see how he could become prime minister without resorting to the kind of backroom deals that characterized the shaky coalitions of the postwar period, when governments often survived no more than months or even weeks.

The most recent opinion poll gave centre-left PD leader Pier Luigi Bersani support of 36 percent, with Monti on 23.3 percent, ahead of both Berlusconi's People of Freedom (PDL) and Grillo's 5-Star Movement.

Monti's involvement in the election has ruled him out as a candidate for president of the Republic, a post that would have given him significant behind-the-scenes influence.

That leaves the possibility of becoming finance minister in a Bersani government, though there has been little sign of enthusiasm either from his side or from the PD, which has maintained a respectful tone towards Monti but now clearly sees him as a political adversary.

GROWTH AGENDA

Beyond the issue of personalities, the deep-rooted problems afflicting the Italian economy will be a formidable challenge to any new government.

"The situation in Italy is not easy, there are too many centres of power where everybody blocks everything. Our infrastructure isn't working and we've got corruption all over," said Renzo Rosso, head of the group behind Diesel jeans, one of the Italian companies that has managed to find a way past the obstacles in its home market to create a global success.

All the main parties in the race have called for more emphasis on creating growth, which along with its towering public debt has long been Italy's Achilles heel.

Monti's own 25-page agenda lays out a range of answers, such as taxing consumption and large fortunes more than companies and workers, and opening up markets to more competition and breaking down the suffocating power of special interest groups.

Turning such ideas into practice and convincing the public to go along with them is another matter.

Reflecting on her time in office, Elsa Fornero, an academic expert recruited into Monti's technocrat government whose labor reform plans were largely stymied by resistance from both unions and employers, said she had learned the difference the hard way.

"In this period of almost a year now, I have been able to measure the distance between being a professor and being a minister," she told foreign reporters last month.

"It's something completely different. I have been more used to formulating rational solutions, but the rationality of a solution is not enough because society is more differentiated and doesn't just live on rationality."

(Additional reporting by Hanna Rantala, Cristiano Corvino and Antonella Ciancio; Editing by Will Waterman)

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