Mario Monti needs a miracle

Italy's gentle saviour is tougher than he looks. Mario Monti is a free-marketeer who disguises Thatcherite views and a steel will behind a cloak of unflappable good manners.

By Ambrose Evans-Pritchard, International Business Editor

As EU competition commissioner a decade ago he battled Germany into retreat over subsidies for the Landesbanken and forced France to break up its electricity monopolies.

He stunned Washington by fining Microscoft €497m (£426m) for abuse of dominant position and blocking the $45bn (£28bn) GE-Honeywell merger, the world's biggest up to that date, after it had already been approved by the Justice Department, as if to say the Americans were failing on the job.

It was Super Mario who turned the EU into a global super-regulator.

The last time we spoke, at Lake Como two years ago, he feared the EU was entering a "quasi-existential crisis".

These have proved to be prophetic words, though he had no inkling then of the role he himself would have to play to save his country, the euro and the world's banking system.

Mr Monti's hand is not quite as weak as it looks. The Italian state is a Christmas tree of valuable assets, owning 4pc of the oil company ENI, 31pc of the utility ENEL, 33pc of the aerospace group Finmeccanica, 100pc of Poste Italiane.

Company sales could generate €45bn quite easily and Mr Monti is already a convinced privatiser. Whether he can convince the centre-left in parliament to back such sales is an open question.

State assets total €1.8 trillion, roughly the same as public debt of €1.9 trillion. There is vast private wealth, by some estimates near €8.6 trillion, making the Italians much richer per capita than Germans or Americans.

The task for Mr Monti to carry out an "internal bail-out" by extracting a sliver of this national 'ricchezza' to rescue the state.

A variant of this was tried in July 1992, when bank accounts were raided by forced levy. Mr Monti will be less capricious. He is a stickler for due process. Options include a tax on residences and a wealth tax that might bring in €100bn.

Unlike Greece, Italy already has a primary budget surplus. It will be 0.5pc of GDP this year and 4pc by 2013 if the overall budget is balanced by then. This is the lowest in the G7 bloc.

The IMF's debt sustainability indicator places Italy top on the good conduct list at 4.1, ahead of Germany 4.6, France 7.9, the UK 13.3, Japan 14.3, and the US 17.

Italy's public debt of 120pc of GDP is in a sense offset by very low household debt of 42pc. Total private debt is 129pc, compared to a eurozone average of 169pc.

Raj Badiani from IHS Global Insight said Italy can, in theory, weather several quarters with 10-year bond yields above 7pc. What changes the picture is the "dangerous mix" of a faltering economy as well.

This threatens to send Italy's debt dynamics into a downward spiral as it struggles to find €300bn in 2012. What Mr Monti faces is really a stagnation crisis, not a debt crisis.

Growth has been just 0.6pc over the last decade, and productivity has been falling. The country has lost 40pc in labour competitiveness against Germany over the last 15 years, leaving it locked inside EMU with an overvalued currency.

Danay Gabay from Fathom Consulting said Italy will be even less able to compete than Greece: "We would distance ourselves from the mantra making the market rounds: that Italy's fundamentals are basically sound and the country is only facing a short-term liquidity crisis."

Mr Monti must, in effect, carry out an "internal devaluation" within EMU to claw back lost ground, squeezing wages and costs below German levels for years after.

Ireland is proving this can be done, but the Irish economy is flexible and exports are booming. It has a current account surplus. Italy has been losing global export share relentlessly as China chips away at its mid-tier manufacturing.

The professor has to perform this conjuring trick at the worst of times, just as fiscal contraction and a eurozone recession tip the economy back into slump.

He has no political base, and his popularity on the Left is unlikely to last long if he takes a machete to Italy's labour laws as demanded by Brussels and the bond vigilantes.

For all the joy in Rome last night, Italy is just as polarised as Britain was when Margaret Thatcher took over a ruined political economy in 1979. The unions are just as militant.

It will take all his charm to hold Italy's ship together through the coming storm, if not a miracle.