March 1, 2013 4:37 pm

EU feels pressure on austerity policies

Mario Monti was in his element. Almost a year into his tenure as Italian prime minister, he was standing in Brussels’ opulent 16th century Palais d’Egmont addressing a group of EU notables as they dined under glittering chandeliers.

In some respects, he appeared more at ease than he did in his native country. Speaking in near flawless English, he peppered his remarks with inside jokes and recollections of his own tenure in Brussels, bon mots that drew knowing laughter from a receptive audience already softened by fine wine.

But near the end of that October 2012 speech, Mr Monti turned serious. Even though he had only been in office one year, he was proud of what he viewed as an important and lasting achievement: disproving the “theorem” proffered by Jean-Claude Juncker, Luxembourg’s prime minister, that when it comes to economic reforms, “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

“We see that the current Italian government, which has done unprecedented damage in terms of inflicting pain, changes through structural reforms and fiscal austerity, fighting against tax evasion and you name it, apparently is rather popular,” Mr Monti told the assembled worthies.

“Certainly [it is] more popular than are presently the parties which refrained from doing the things we are doing because they thought they were too unpopular,” he added. “Maybe when we return to a normal political majority, with a political leader, there will have been a process of maturation.”

Four months later, that prediction lies in tatters. Not only did the political coalition headed by Mr Monti receive a dismal 10.5 per cent in this week’s election, but the two candidates vowing to roll back EU-mandated reforms – former prime minister Silvio Berlusconi and populist outsider Beppe Grillo – polled more than 55 per cent between them.

Their success took place just eight months after a similar anti-austerity movement in Greece, the Syriza coalition headed by Alexis Tsipras, came within a hair’s breadth of becoming the largest party in Greek elections. In Spain, where consecutive governments have been implementing the toughest austerity measures in any non-bailout country, there are street protests.

“Anger and frustration are on the rise in the whole of southern Europe,” says Jean Pisani-Ferry, head of the Brussels think tank Bruegel. “They show up in the polls or in the streets or both, but whichever way they cannot be ignored.”

In some ways, the political upheaval taking place was anticipated by leaders fighting the crisis. International Monetary Fund officials acknowledge they have intentionally “front-loaded” reforms in bailout programmes because of the political fatigue that inevitably sets in.

But whether upheaval in Italy signals the beginning of a widespread rejection of EU-sanctioned economic policies – and if so, what should be done about it – has divided European officialdom even before votes were counted in Italy.

Axel Dreher, a Heidelberg University economist who has studied political instability in bailout countries, said that while there is no hard and fast rule about how long voters will tolerate economic hardship, Europe shows some of the signs warranting concern.

“It depends a lot on whether you think the process that got us here is fair,” Mr Dreher said.

By that measure, Mr Monti is an imperfect template to judge what may happen elsewhere. A formerly apolitical economist, he won respect domestically for restoring national dignity after the humiliating corruption and sex scandals of his predecessor.

But his austerity policies and the heavy hand of Equitalia, the state debt collection agency, reinforced widely-held suspicions that the less well-off would have to pay the price of his “sacrifices” through tax increases and cuts in public services. For many centre-right voters, Mr Monti was also seen as part of a European and German-led conspiracy to bring about Mr Berlusconi’s downfall in November 2011.

For his part, Mr Monti this week argued he is a harbinger, warning that tough reforms risk the same kind of backlash elsewhere unless the EU finds ways to show voters more quickly their sacrifices are bearing fruit.

“There are lags from the moment a good policy measure is implemented, be it a structural reform or budgetary deficit containment, and the moment the benefits are visible,” a far more haggard-looking Mr Monti said during his first post-election speech in Brussels on Thursday. “There are big, big problems, and big political problems in the understanding by the public opinion if these beneficial responses do not materialise.”

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