Mario Monti Arrives: The New Italian Technocratic Government

If all goes according to plan, it appears that by early next week Italy will have taken bold steps to head off financial turmoil. News of the possible appointment of respected economist and former European Union Commissioner Mario Monti to the post of prime minister to lead a nonpartisan technocratic government has been welcomed by European leaders and financial markets. His solid credentials will bolster confidence in Italy as it attempts to confront the crisis.

The technocratic government is not a new phenomenon in Italy. The appointment of a nonpartisan technocrat by the president of the republic -- who generally is more of a figurehead than his American counterpart -- in response to financial or political turmoil has already been tried in Italy.

The 1992 Case Study

In April 1992, the first post-World War II Italian republic, dominated by Christian Democratic Party (Democrazia Cristiana/DC), came to an abrupt end at the polls. Following a disastrous showing at the polls, the DC, a party that had either governed or else remained the dominant party in all 40-plus governments since 1946, collapsed under a series of scandals. The same fate was met by its much smaller but still influential coalition partner, the Italy Socialist Party. While a Socialist Party intellectual, Giuliano Amato, who himself was more of an academic than a politician, and more of a free-market supporter than not, took the helm as prime minister, Amato successfully managed to distance himself from the old political class.

Against a backdrop not only of political but also of financial disarray, the Italian lira plummeted and exited from Europe's exchange-rate mechanism in September 1992. Several months earlier, European nations had signed the Maastricht Treaty on the European Union and committed themselves to curbing public finances in the run-up to the creation of the single currency by the end of the 1990s. However, financial markets expressed little confidence that Italy could address its finances and meet its commitments under the recently signed Maastricht Treaty. The political turmoil following the April 1992 vote only made things worse, and things came to a head with the September 1992 currency crisis.

In response, Prime Minister Amato implemented significant austerity measures, which began a process of fiscal consolidation. The Amato government resigned the following year as the political crisis deepened, but President Oscar Luigi Scalfaro decided that a nonpartisan government led by a respected technocrat was needed to prevent the recurrence of financial crisis, given that the party system remained in disarray. The president appointed central bank governor Carlo Azeglio Ciampi to lead a nonpartisan government. The well-respected ex-central banker continued the prudent policies of his predecessor, and shored up confidence in Italy's fiscal commitment to Europe.

1994: Berlusconi Enters, and Exits

In March 1994, two years after the electoral earthquake, Italy once again went to the polls. By then, a new political party had appeared out of nowhere. Forza Italia was formed by Silvio Berlusconi, one of Italy's richest men, and contested the elections in an unlikely alliance that included a northern regionalist party, the Northern League, that wanted greater political and fiscal decentralization, and a former neo-fascist party, the National Alliance, that enjoyed strong support in Italy's center and south, and which preferred strong central authority.

It was the tycoon's first electoral victory. Yet the Berlusconi-led coalition lasted only months and collapsed in December 1994, as the Northern League and the National Alliance leaders feuded with each other and with Prime Minister Berlusconi, while little could be done to continue the process of fiscal consolidation begun under the previous two administrations. The collapse of the government sent shock waves through financial markets, and the lira plummeted once again because of the political instability and policy uncertainty.

1995: Dini Arrives

Rather than going to the polls during a time of crisis, President Scalfaro opted for a second technocratic government. Lamberto Dini, another nonpartisan senior central bank official, was selected to lead a new coalition in early 1995. He passed convincing budget legislation to placate financial markets and Italy's European partners, setting Italy on the path toward eventual entry into the single-currency club.

Now it has been 15 years since Italy last experienced technocratic rule. Yet once again financial and political crisis has prompted the current president, Giorgio Napolitano, to contemplate another technocratic government. Berlusconi's political clout has waned at home, while his reputation abroad is one of a leader who lacks the seriousness and gravitas to face such a severe financial crisis.

Furthermore, this time the financial crisis is more dangerous and more systemic than the previous crises. The two technocratic governments of the 1990s needed only to think of safeguarding Italy's financial position alone. The presumed new technocratic government of Mario Monti would have to stabilize Italy's position for the sake of the very survival of the Eurozone area and its currency. Thus, any failure of a new technocratic government in Europe's third-largest economy to regain the confidence of European leaders and nervous institutional investors could have far-reaching and disastrous consequences.

Friday: A Ray of Light

On Friday, there were some hopeful signs that things are moving forward in Italy, but there is also reason to remain cautious. The Italian parliament approved a new budget law Friday, while additional, substantive deficit-cutting measures are expected to be approved Saturday. Also expected Saturday after approval of austerity measures is the resignation of embattled Prime Minister Berlusconi. The invitation by President Napolitano to Mario Monti to become prime minister and to form an emergency nonpartisan cabinet should take place either Saturday or Sunday. All this is a tall order for one weekend.

Already, another technocrat, former European Central Bank official Lucas Papademos has been sworn in as prime minister in Greece. This must be followed in very short order by Monti's swearing in as prime minister in Italy. Any dithering in the passage of austerity legislation, in Berlusconi's resignation, or on the appointment of Monti will alarm stock, bond, and currency markets in Europe, the United States, and Asia.

The appointment of Monti alone would not mark the end of the crisis. Markets will be watching to see how much room Monti's nonpartisan government will have to maneuver and implement credible structural reforms. Any hindrances to the government's ability to implement policy will not escape the notice of markets.

On the eve of the start of a new technocratic government in Italy, there are other lingering issues that Italy's democracy must confront, concerning the eventual duration of the technocratic government and the suspension of politics, the legitimacy of the suspension of party politics, and the impact that a nonelected government will have on the perceptions and credibility of the Italy party system. But these are issues that must be addressed by Italy's political class tomorrow, not today. For now, the crisis must receive 100 percent of the attention of Italy's political class.

It is in no small measure ironic that the Berlusconi era -- which began with the promise of a new style of stable politics -- may be bookended by two technocratic governments charged with bringing stability to the country's politics and finances. The Monti appointment would do much to bolster Italy's credibility at a time when not only Italy but also the entire Eurozone area faces an existential crisis with which the outgoing prime minister was unable to come to grips -- the very survival of the euro currency.

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David Felsen is associate professor of international studies at the School of Management at Alliant International University in San Diego.