Italian Prime Minister Mario Monti has slashed pensions, begun a broad economic restructuring and agreed to a European treaty that tightens fiscal controls — all in the name of proving his country is serious about controlling debt.
As he arrives for his first official visit with President Obama on Thursday, he’s begun pushing back.
With Europe at risk of a new recession, Monti is pressing what he sees as the next battle in the region’s financial crisis: finding ways to renew growth at a time when countries remain overburdened by debt and major powers such as Germany are intent on enforcing fiscal discipline.
Italian officials and others say he will make the case for White House support as he presses other European countries to focus not just on debts and deficits but also on strategies for ensuring that austerity does not become self-defeating.
The recently signed treaty on debt reduction, for example, will force Italy to further reduce spending even after it balances its annual budget next year — and even if the economy continues to contract as it is doing now.
Under the compact, Italy “will have to implement unsustainable cuts while the treaty says nothing about growth-enhancing measures,” said Domenico Lombardi, a former Italian member of the International Monetary Fund’s executive board and a senior fellow at the Brookings Institution. “He does agree that debt has to be reduced, but if the economy is collapsing you cannot impose another cut or it would irreversibly kill growth” and ultimately make the debt situation worse.
In an interview in Italy with the Wall Street Journal in advance of his U.S. trip, Monti said the bite of austerity, rising unemployment and a sluggish economy means that “Europe will not be a nice place to live in five years from now if we haven’t solved the problem of how to grow.”
Higher rates of growth ease a country’s debt burden by increasing the tax revenue available to make payments and spreading the amount owed over a larger economic base. Efforts to control government deficits — unavoidable in countries such as Greece that have lost the ability to borrow affordably on international markets — can depress growth in the short run by reducing government salaries and jobs and payments to businesses that provide goods and services.
The tension between growth and austerity has become a central global concern. High debt has left some developed nations with little room to launch the sorts of publicly funded stimulus programs launched in the United States, Europe and elsewhere to counter the 2008 financial crisis. Yet the world may be edging toward a new slowdown and be in need of a boost.
Europe’s troubles are already cutting into world growth as the region’s spending on imports declines, threatening even larger problems if the downturn deepens. Officials at the IMF have told more modestly indebted countries they should avoid cutting government budgets too fast, while encouraging low-debt countries such as China to think of ways they might boost spending to support economic growth around the world.
High unemployment on its own, the International Labor Organization warned in a recent study, threatens a “third stage” in the global economic crisis as households spend less because of lost jobs or concern about the future.
Italy is at the epicenter of the debate, a make-or-break case that could determine whether the euro zone crisis glides to a resolution or continues to deteriorate, potentially pushing the U.S. economy back into recession.
Its trillions of dollars in outstanding debt and its large economy would overwhelm both Europe’s and the IMF’s capacity to fund a bailout. In a word, Italy is the reason the euro region is being pushed to put more money into a crisis-fighting fund and why the IMF is trying to add $500 billion to its own financial “fire wall.”
Its economy has been in the doldrums for years, near the bottom in world rankings of economic growth and now expected to shrink about 2 percent in 2012, according to the IMF.
Monti has gone along with the budget-cutting because it was needed to restore the country’s credibility with other European officials and international investors who had lost faith in former prime minister Silvio Berlusconi’s ability to address his nation’s economic problems.
Now he is urging Europe to turn its attention to restoring growth. While he plans local steps long advocated by the IMF — such as making it easier for companies to hire and fire workers — Monti, an Italian official said, is planning to press for Europe-wide measures as well, some of which could prove contentious.
Monti, a former member of the European Commission, is arguing that long-standing regulatory and other barriers are preventing workers and investment from freely moving around the region, according to officials familiar with his thinking, stifling employment, investment and growth despite decades of effort to build a common European market.