(cross-posted from Core)
The Italian political scene has given rise to a phenomenon seen often in developing countries: a care-taker government run by a respected economist with an implicit mandate to ‘get the country out of the mess’. That mess, a public debt of 120% of GDP that outside financial observers are increasingly sceptical can be paid back, has two possible happy endings: some outside agency manages to miraculously get Italy to grow or Italy manages internally to re-start economic growth.
In terms of what the best policy would be to get Italy growing again, you don’t need to be a genius economist. It can be summed up in one phrase: the special interest groups that paralyse Italy need to be tackled. Well, that and producing babies again, for there is no long-term growth without people!
What special interest groups, you might ask? The tax evaders, which are heavily represented in the top layers of society; the entrenched old civil servants who are close to an overly generous pension paid for by too few young workers; the many special subsidy receivers (including millions of welfare dependents); the criminal gangs who siphon off parts of the national wealth and evade taxes (the shadow economy is estimated by Schneider, using fairly controversial methods, to be 20%); the professional cartels who have a stranglehold on health and bureaucratic services (think of medical specialists and the closed professions); etc.
It’s not the solution that is hard, but implementing the solution: tackling special interest groups is incredibly hard. They are well-organised, know the law better than others, have their tentacles through all the main political parties, have captured part of the public debate such that few even recognise that they are the problem (rather, they are seen as the pillars of society), and they are highly alert to any threat to their position. This is also why they are so entrenched: before any political party can mount a campaign against them, they would already have opened a counter-attack against the political forces mustering against them. They are undoubtedly watching the situation closely, ready to fight any incursion to their rights.
So, what should Mario Monti do?
My advice is to move with lightning speed and to actively maintain a sense of desperate crisis until a reform package is agreed and is being implemented. Mario has to feed that atmosphere of desperation and encourage a widespread belief that Italy is staring into the abyss if he is to have any chance to dislodge some of the major interest groups. The first thing he should do is to arrange for new information to be brought out every week outlining how much worse everything is than previously imagined. The debts are higher, tax collection is lower, crime is higher, capital flight is worse, etc. This is the time to talk Italy down, whilst projecting confidence that he knows how to get Italy out of it under the right ‘tough measures’.
How quick should he move? I would say that he would need to get key legislation to parliament that tackles the most crippling interest groups (tax evaders and ageing civil servants) in no more than a couple of weeks. If he gives the interest groups 6 months to rally against him, he has no chance. Undoubtedly, the interest groups will still mount demonstrations and a vigorous media campaign if he manages to get legislation to parliament within weeks, but if he is fast enough then Mario will have the advantage that there is a feeling of desperation and that there is no alternative to his package.
In order to do this, Mario will need help. Given his relation to a raft of European think tanks (Friends of Europe, Bruegel, and several others) and a large network of connections, he should be able to find help. He will have to rely on young people with the energy and drive to spend many sleepless nights on new legislation designed to disentangle the embrace of the interest-groups from the Italian state. He should know that there is no chance to keep such an assault a secret, so he should assemble small teams of young experts as soon as he can and establish the right expectations amongst these groups (i.e. that their mission is to tackle the interest groups). They should be told to work harder than the interest groups can organise to oppose them and he should see his own job as tirelessly protecting these teams from the assaults on them that will come from within the bureaucracy and parliament. He should probably aim to get a couple of quick wins under his belt to cement his position. Going after some famous tax-evaders should do the trick, hopefully Berlusconi.
What should Mario not do? Mario should not play the ‘trust me, things will work out’ game, giving out positive and soothing noises about the Italian economy. He also should not spend a half year forging alliances between various parties, trying to hammer out compromise programs that a coalition of parties could agree to. If he does that, he will find himself with nothing: his coalition would sift like sand through his fingers when the going got tough; the markets would eventually see through the optimistic chit-chat; and no serious changes will occur. He might still get austerity packages through (they are much easier to implement than tackling interest groups), but getting the economy going forward again would be out of sight.
Is Mario the kind of dynamic, fast-moving economist Italy at this time needs? I have never met him, but at the EU, he was a respected commissioner, known for being calm and collected, deliberating each decision carefully, in charge of the tough cases requiring diplomacy. He is the kind of person known as a safe pair of hands, able to see the woods through the trees, making the noises everyone wants to hear. He is the consummate insider who advises Coca Cola and mediates between governments.
Unfortunately, Italy does not need an ageing safe pair of hands. Mario’s party trick, that of being the smart guy in the room who calmly works at the behest of established political powers, will simply not be enough in this case. He is in a vipers nest asked to do the impossible. The question is not whether he can placate the vipers, but whether he can do what needs to be done before he is bitten. Italy needs someone with the political instincts of a cheetah, prepared to make unexpectedly fast moves against well-entrenched interest groups.
It is a tough ask to go from the trusted wing-man to the treacherous cheetah pouncing on Italy’s internal enemies before they can mobilise. He seems too used to spinning things positively to play the part of the harbinger of doom in order to create the desperation he needs to create political support for a reform program. We will see.
Update 18/11: so far, so good. Mario has more or less appointed whom he could and has named all the elements in the blog above as things he wants to reform: tax evasion, welfare, the labour market, education. He also talks of urgency.
Let’s see if he stays on track with quick reforms + desperation campaign.