Italy has a nearly 3,000-year history of violent and costly attempts at cohesion. Now, its people must take unity to a totally new level, coming together over painful reforms that will make or break the world’s eighth-largest economy – and the euro currency that holds much of Europe together.

The Nov. 12 resignation of Italian Prime Minister Silvio Berlusconi gives the country the opportunity to defy its history. The designated premier, Mario Monti, is a respected, Yale-educated economist, whose support for substantial reforms is an encouraging sign after 17 years of chaotic rule under Mr. Berlusconi.
But a daunting number of things will need to go right – and quickly – for Professor Monti to save the country.


First, a new Italian government must instill confidence within bond markets that it can actually meet its debt payments. Italy needs over $400 billion in external financing next year alone to cover its projected spending. By comparison, Greece’s much smaller economy has a projected budget shortfall of about $20 billion.

Rome has to get this financing either from the bond market, or from bailouts by other governments and the International Monetary Fund. Yesterday marked the first test of the market’s willingness to lend to post-Berlusconi Italy. The government was able to sell over $4 billion in bonds, but at a significantly higher cost in interest rates than previous bond sales.

Market confidence could be strengthened if the new caretaker government in Rome quickly implements a package of budget cuts and reforms that the Italian Senate passed on Nov. 12. This mix of spending cutbacks, changes to labor laws, and efforts to streamline government regulation is a recipe of “orthodox” reforms that many Latin American and Asian economies implemented in the 1980s and 1990s. What the approach lacks in originality it makes up for in proven success.

Second, and most important, Italy has to fundamentally alter its political culture. Every level of government in Italy – basically, the rhythm of Italian life itself – is highly organized and deeply entrenched.

If financial markets sense hesitation, they will stop lending the government money, and the country will be forced into a disastrous default. The markets will perhaps give Italy’s people and politicians only a few days to mount a convincing case that they are willing and able to take on Italy’s political machinery and economic malaise.

Italy actually had sufficient time to pay off its debt – before the European debt crisis in other countries forced the issue. While Italy’s total debt level is high at 120 percent of gross domestic product, its annual fiscal deficit is about the same as Germany’s. And its economy comprises a healthy mix of industry and services, with a robust export sector.

But failed attempts by Europe to articulate a convincing plan to manage eurozone debts pushed Italy to the brink by forcing up costs of borrowing. To that extent, not all of this crisis is Italy’s fault.

Beyond quick action, Italy must focus on boosting economic growth, which is an even greater challenge.

Italy’s low growth stems directly from its dismal business environment. The country ranks 87th out of 183 countries for ease of doing business, according to the World Bank. That’s four slots lower than last year. As an indicator of the political challenges embedded in this poor performance, Italy ranks 134th in taxpayers who actually pay their taxes, below Yemen and Sierra Leone, and well below Greece. To get electricity to a new business takes an average of 192 days and costs more than 327 percent above what the average Italian earns in a year.

The reform and austerity measures Italy has proposed are designed to address many of these issues, but they do not go far enough. Some parts of the planned austerity package can be quickly implemented, such as selling state-owned enterprises, tax increases on purchases and on wealthy individuals, and tax breaks to companies that hire young workers.

Most of the measures, however, will only yield benefits over the medium and long term, including education reform, rule changes to ease hiring and firing of employees, streamlining government services to reduce opportunities for corruption, and support for entrepreneurship.

Most critically, the reforms do nothing to address the country’s massive pension system, which absorbs 30 percent of the government’s total spending at a cost of 16 percent of GDP – the highest level in the world, according to research by Deutsche Bank.

These changes would be incredibly difficult in normal times. But after Berlusconi’s feckless and polarizing rule, public trust in government has been badly damaged. That may well make it tougher for the new government to forge a deal with its people – even if it is made up of “technocrats” instead of wily politicians.

Finally, Italy is dependent on its euro zone partners to calm the financial markets, and right now this looks unlikely.

The new European “rescue fund” is too small to bail out Italy. And the rules governing the euro prevent transfers from wealthy to struggling countries. Germany is on record saying it does not support changing this by expanding the European Central Bank’s efforts to buy Italian bonds, which most commentators see as the only viable option to support the country as it makes reforms.

Italy may survive the crisis if it acts decisively and with more unity than it ever has. If it fails, the euro may very well unravel, plunging Europe into recession, and taking much of the rest of the world with it.

The solution requires immediate and painful concessions by Italy’s people, and, in the long term, a fundamental change in mindset. Italian political commentator Beppe Severgnini wrote in Sunday’s Financial Times that “We Italians may be careless at times, but we are sensible when we want to be.” Let’s hope he is right.

Alexei Monsarrat is the director of the Global Business and Economics program at the Atlantic Council.This article originally appeared in the Christian Science Monitor.