Rome — It has become the new paradox of European economic policy: There is no saving the euro without saving Italy, and there is no saving Italy without saving the euro.
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
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Which perhaps explains why Mario Monti, Italy’s new, “non-political” prime minister, hosted the leaders of France, Germany and Spain in Rome on Friday as part of his increasingly desperate effort to force a resolution to a euro crisis that is dragging Italy, Europe and possibly the global economy back into recession.
If you have been following this long-running financial soap opera, you know there are those who argue, with good reason, that because it was a monetary union without a real fiscal and economic union, the euro zone was always doomed.
The counter-argument is that even the United States didn’t emerge fully formed as an economic and political unit with the ratification of the constitution — that it took time to evolve, often in response to difficult crises just like the one Europe is going through now. Those in this camp — and I count myself among them — are not so foolish as to believe that a success is inevitable, and neither is failure.
It should be no surprise that Monti has emerged as a key figure in this process. It is not simply that Italy’s huge debt load (120 percent of gross domestic product) makes it exquisitely sensitive to a crisis whose severity has come to be measured in interest rate spreads on sovereign bonds. He’s also a Yale-trained economist, the former rector of Italy’s leading economics and business university who spent a decade pushing European economic integration as the European Union’s top antitrust official in Brussels.
Now, he’s technocratic turnaround artist brought in to clean up after the clownish former leader Silvio Berlusconi, and free to do what he thinks best for Italy without any concerns about winning the next election. It also helps that he has the respectful ear of President Obama.
Most significantly, Monti is well-positioned to act as the honest broker between France’s new socialist president, Francois Hollande, who wants to shift the focus of European policy to pro-growth fiscal and monetary stimulus, and German Chancellor Angela Merkel, a stubborn champion of hard money, tight budgets and market-friendly structural reforms. As the leader of an economy shrinking at the annual rate of 2 percent or more, Monti is determined to put growth back at the top of the European policy agenda. At the same time, his tough moves to raise taxes, cut spending and reform Italy’s notoriously uncompetitive labor and product markets have won him credibility with Merkel and investors.
In truth, there is no simple Keynesian solution by which the euro zone could borrow-and-spend its way back to growth. With the notable exceptions of Germany and a few of its smaller, northern neighbors, borrowing costs for most of the continent are simply too high, and if those two countries were to try to stimulate with tax cuts or increased government spending, the spillover effects on the rest of Europe would be modest at best.
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