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Mario Monti's Political Gambit: Does It Jeopardize Reform?



The announcement by Italy's technocrat prime minister, Mario Monti, of his intention to resign after parliament's approval of the 2013 budget law came as a surprise for most observers. Premier Monti attributed his decision to the withdrawal of crucial support by PDL (People of Freedom Party), which had supported his technocrat government for the past 13 months. His move probably shifts the election date to as early as February, which is sooner than expected.

The prospect of general elections next April had already stirred attention and speculation across Europe and overseas. As the third largest economy of the European Union, Italy faces the burden of a challenging fiscal adjustment process, with major consequences for the future of the euro area. Many Europeans are worried about a return of former Prime Minister Silvio Berlusconi, who announced over the weekend that he would seek office again. The widespread fear is that he might wage a populist campaign aimed at undoing Monti's economic reforms.

Accordingly, following Monti's announcement, government borrowing costs went up, and the stock market fell sharply on Monday. Markets' reaction also hit the euro. There are fears that market instability might continue in the coming days.

In such a situation, a word of caution is in order.

Monti's resignation simply advances the due date in which the transition from a technocrat government to a political one will take place. It does not necessarily mean a change in the likely outcome. Indeed it is likely that a government seriously committed to restructuring and adjustment will follow the present one. As a matter of fact, Monti's choice has made very clear that for Italy to continue to move along the right track toward economic reform, strong political stability and support are needed. With his announcement, Premier Monti has reinforced the popular perception that his technocrat government has done its best to pursue the general interest of the country and Europe. He has also shown that, when backed by the necessary political support, a technically skilled government can implement adjustment.

Without the necessary political support, it was impossible for Monti to fulfill his government's mandate and intentions. The prime minister thus had no choice but to resign. Trying to operate amid the conflict and obstacles raised by the withdrawal of the PDL party would have been a weak and losing strategy. It would have discredited the government, hampered its efforts, and sent a bad signal to the markets and the electors. Faced with the impossibility of continuing the reform process to which he was committed, Monti has shifted the game and the responsibility for reform to the political arena. There is now a chance that the Italian adjustment process will be ratified by voters, and that, following the elections, a technically capable and politically strong government will be able to take up the process initiated by the technocrat government and boldly push it ahead. The new government should be able to pursue a program to put the economy back on track, fulfilling Italy's important commitments within Europe.

Far from reversing the reform process, Monti's choice could pave the way to reinforcing his strategy of recovery, enhanced by voter support. The markets' concern that reform could be derailed is clearly understandable. But there is no reason to think that pressures and instability will continue. Italy was on the verge of economic disaster 13 months ago. It has taken major steps in the right direction since then, demonstrating its ability to recover, with the encouragement of various European partners, including the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF). A technocrat government should be seen as an exceptional device, however, justified by exceptionally adverse conditions, like those experienced by Italy at the end of last year. A transition toward a new political season in Italy should therefore be viewed as an opportunity that the next stage of the adjustment process will be based not only on technical skills but on political consensus.

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