Monday 24 June 2019

The full Monti

The former EU commissioner has his hands full as he attempts to resurrect Italy's reputation on the bond markets

With Silvio Berlusconi having resigned as Italian prime minister, his likely replacement, former EU Commissioner Mario Monti, faces an unenviable task as he tries to save his country from bankruptcy and ejection from the eurozone.

Last weekend, after months of ducking and diving, Mr Berlusconi finally resigned after the Italian parliament approved an austerity programme largely dictated by the EU/ECB/IMF 'Troika'. He also pledged not to stand in the general election, now scheduled to be held in mid-2013.

Although Mr Berlusconi tried to engineer the succession of his protege, Sicilian lawyer Angelino Alfano, the general secretary of his PDL Party, as prime minister, such was the hostility to any notion that the outgoing premier might somehow maintain his position through a surrogate that the job went instead to former EU Commissioner Mario Monti.

The new prime minister, who will head the Italian government until after the 2013 general election, inherits a poisoned chalice from his predecessor. At €1.9 trillion, Italian government debt is the third largest in the world in absolute terms and is the equivalent of 120pc of the country's annual economic output as measured by GDP.

Such a high debt/GDP ratio left Italy extremely vulnerable to changes in market sentiment. Although unlike other eurozone PIIGS (Portugal, Ireland, Greece and Spain), Italy isn't running a large budget deficit, only about 4pc of GDP this year; and the country actually has a primary budget surplus when interest costs are deducted; a spike in interest costs could easily tip the nation into bankruptcy.

That is what threatened to happen over the past few weeks. At one stage, Italian bond yields climbed over 7.5pc. If Italy was forced to pay those sorts of rates on all of its debt it would face an annual interest bill equal to 9pc of GDP. Such an interest burden would be unsustainable, which is why the markets took fright and sold Italian government bonds in unprecedented quantities.

After the comic opera of Berlusconi with his "bunga bunga" parties, seemingly endless corruption charges and extravagant facelifts, Italy badly needs to present a more sober face to the world if it is to even begin regaining the confidence of the markets. This made it vital that the new Italian prime minister could not be seen to be in any way beholden to his predecessor. A clean break with the past was essential.

All eyes very quickly turned to Mario Monti, an academic economist and a former EU Internal Markets, Financial Services and Competition Commissioner.

Although Mr Monti only became prime minister in the teeth of fierce opposition from Mr Berlusconi, the two men were once close. It was Mr Berlusconi who appointed Mr Monti to the European Commission in 1995, soon after he first became prime minister.

Mr Monti served as the Internal Markets and Financial Services Commissioner from 1995 to 1999 and as Competition Commissioner from 1999 to 2004. However, by 2004 the relationship between Mr Monti and Mr Berlusconi had cooled and he was not reappointed to the commission by the Italian government when his second term expired in 2004.

It was as Competition Commissioner that the former economics professor established a reputation for toughness and independence that was to eventually see him appointed premier last weekend.

In 2001, he scuttled a merger between GE and Honeywell. Although both companies were headquartered in the US, Mr Monti ruled that as they each had large European business with tens of thousands of employees, a merger would make them too dominant in certain industrial sectors in Europe. He also launched anti-trust proceedings against US software giant Microsoft. This resulted in the company being fined a massive €497m in 2004 when he ruled that Microsoft made it too difficult for rival software to operate on its Windows system.

However, despite blocking the Honeywell merger with GE -- which was chaired by Jack Welch at the time -- Mr Monti doesn't seem to have been biased against American companies in his decisions, although he did include a chapter entitled "Go home Mr Welch" in his autobiography.

Mr Monti was equally tough when making rulings involving European companies. When the French government sought to assist financially troubled "national champion" Alstom in 2004, the engineering giant that manufactures the high-speed TGV trains, Mr Monti insisted that the company sell some of its assets before it received any state aid.

This provoked a furious outburst from the then-French Finance Minister Nicolas Sarkozy, who said that "some people in Brussels wished Alstom died".

However, despite not being afraid to hand down tough and sometimes unpopular rulings, Mr Monti seems to have retained the respect of most of those with whom he has crossed swords. They may have disagreed with his rulings, but there were few who questioned the intellectual rigour that underpinned them.

Even the notoriously prickly Mr Sarkozy eventually kissed and made up with Mr Monti, appointing him to a committee to examine ways of boosting French economic growth after Mr Sarkozy was elected French president in 2007. Mr Sarkozy was also a keen supporter of Mr Monti's appointment as Italian premier.

Clearly anyone who can, after first falling out with the notoriously prickly Mr Sarkozy then manage to get back on his right side, is no mean operator. Those who have dealt with Mr Monti invariably describe him as courteous but formal.

Unfortunately for Mr Monti, while both Mr Sarkozy and German Chancellor Angela Merkel were almost embarrassingly enthusiastic in their support for his appointment, it was a very different story closer to home, with his predecessor Mr Berlusconi bitterly clinging to office.

While the media mogul eventually quit and has promised to support the Troika-dictated austerity programme being implemented by Mr Monti's new government, few expect Il Cavaliere to refrain from mischief-making against his successor for long.

After all, Mr Berlusconi was first prompted to enter politics in the early 1990s in order to gain immunity from the various corruption charges he was facing. With the former prime minister due to go on trial for the latest set of corruption charges against him in April, he will surely be tempted to bring down the Monti government sooner rather than later. With the Monti government now expected to attempt to stay in office until mid-2013 rather than call early elections, Mr Berlusconi also appears to have quietly abandoned his earlier promise not to be a candidate.

Despite the scenes of jubilation that greeted Mr Monti's appointment, few expect his initial popularity to last as the austerity measures begin to bite. Mr Monti's position is further weakened by the fact that his government doesn't include a single elected politician in its ranks.

With Mr Berlusconi still controlling a majority in the lower house of parliament, Mr Monti's position will become ever weaker as the June 2013 election deadline draws closer. Whatever the eventual outcome, it is now clear that the Berlusconi era, which began when the former cruise-ship crooner and current media magnate was first elected prime minister in 1994, is still far from over.

Irish Independent

Also in Business