“Save Italy”. The name chosen by prime minister Mario Monti for the austerity package announced on Sunday could have hardly been more telling. The indulgent days of Silvio Berlusconi’s Forza Italia are gone for good. Now the country has entered the age of Salva Italia.
Mr Monti’s package includes tax hikes and spending cuts between 2012 and 2014 worth €30bn. Only €10bn will be reinjected in the economy. The rest should ensure the country succeeds in balancing its budget by 2013, in spite of ailing growth and rising interest rates.
Mr Monti’s measures favoured tax hikes instead of spending cuts. There is a strong argument for shrinking the size of Italy’s gargantuan public sector, but tax rises have the advantage of being more credible and immediate in the eyes of the markets. Mr Monti was also right to opt for an increase in property taxes. In a country with rampant tax evasion, raising the income tax would have been seen as unduly unfair. Those hardest hit would have been those who actually pay their dues.
On the spending side, the pension reform introduced by the new minister for welfare, Elsa Fornero, deserves praise. Switching from a defined benefit to a defined contribution system and clamping down on rules that allow people to retire early was the right thing to do. The reform by Mrs Fornero – a pensions expert – shows that Italy has much to gain from having competent women in the Cabinet rather than former pin-up girls.
Front-loading the austerity package makes sense politically. It will be hard for parties to water down the measures while the technocratic government is still in its early stages. However, austerity on its own is insufficient. The challenge is to kick-start Italy’s stagnant growth.
The package includes some initial steps to open up closed-shop professions to competition. But Mr Monti, as a former EU competition commissioner, should be even bolder. Just as important is a comprehensive reform of a labour market which favours insiders.
Mr Monti should also make sure that the package is seen as equitable. Simply taxing boats and large cars is not the answer, as the unions’ promise of a strike next week shows. He must clamp down on tax evasion. The bonanza enjoyed by Italy’s high-paid politicians must also be stopped.
Whether Mr Monti can save Italy ultimately depends on whether Europe is able to save itself. This budget shows that Rome is doing its part. Europe’s leaders – long critical of Italy – should take note.