The IMF and Italy: A Helping Hand

The IMF's annual consultation mission is currently in Italy. First off, it's worth pointing out that the visit is part of the standard periodic check-up to which all 188 members of the IMF – even the most virtuous – are subject under the organization's Articles of Agreement. The situation has, mercifully, moved away from the climate of high anxiety and mistrust that prevailed at the G-20 summit in Cannes last November, when increasingly apprehensive partners pressed the then-government to accept quarterly EU-IMF monitoring to ensure adjustment and reforms, no longer postponable. There then followed a somewhat confusing interlude, during which the IMF appeared to nurture continued doubts about the country's ability to rescue itself, mulling the possibility of keeping the pressure up via a precautionary arrangement. Much water has since flowed under the bridge, leading to the current situation, with Italy no longer under special surveillance and subject rather to normal Fund procedures.

This is no mean achievement, in only six months. But it does not mean that the emergency is over, as sovereign bond spreads gloomily remind us every day. In a situation that thus remains critical, the task of this year's IMF mission is not only important but also delicate and uncommon. Delicate because ever-edgy markets risk being further shaken, in the very midst of the staff's visit, by external factors, namely the results of the second round of elections in France and the vote in Greece (both on May 6), and by the flux in Spain. In such a setting, any IMF critique of Italy could trigger disorderly movements. At the same time, however, an overly cautious and uncritical assessment would be of scant use. Striking the right balance will not be easy, but an approach of constructive criticism will ultimately be preferable to an attempt to smooth any differences via aseptic drafting, devoid of practical content and recommendations.

Besides being delicate, the mission's task is also uncommon. Customarily, discussions with the Fund are between the organization's technocrats and the country's politicians, with the former trying to convince the latter of their arguments. In Italy's current situation, this effort of persuasion appears largely superfluous – it can at most serve to strengthen the government's action where it has fallen short. Generally, however, not because of lack of conviction but rather because of the obstacles raised by the plethora of entrenched interests and their defenders within the parties supporting the government. In this environment, it will of course be useful to prod the government, but above all to indicate what experience teaches us on optimal reform sequencing, and to provide arguments vis-à-vis the reforms' opponents. The Fund has a distinct comparative advantage in this regard: not of course in better understanding a complex country such as Italy, but rather in being the repository of a multi-annual global experience, with first-hand knowledge of what has worked best in promoting stability and growth across many countries.

A first, recurring lesson in the Fund's experience, and relevant to Italy today, is that in all crisis countries needing radical reforms – but facing more or less proximate elections – the key to success was found in a political engagement of both the government and the opposition to maintain the reform effort beyond the elections (with Brazil, Ireland, and Portugal being cases in point). In Italy's current circumstances, a similar commitment should bind the main parties supporting Prime Minister Mario Monti's government. Without such an agreement, increasing turbulence may be expected as the 2013 elections approach, when everyone will recall how Italy's history is already dotted with the experience of progress achieved under various "technocratic" governments (Amato, Ciampi, Dini) being subsequently undone.

There are many other issues currently on the agenda on which the Fund could usefully contribute by drawing on its international experience. There is, for example, a wealth of empirical material illustrating the advantages of flexible labor market entry and exit, with examples from elsewhere potentially helpful to evaluate the proposals currently on the table in Italy. On the spending review, too, the Fund not only has a broad overview of worldwide "best practices," but has already closely examined the Italian case itself, delivering a detailed report in 2007 to then-Minister Tommaso Padoa-Schioppa – this report could usefully be dusted off. On taxation issues, in addition, the Fund has for years conducted research and provided technical assistance: among other things, it could easily clarify the importance, in every advanced country, of property taxes, not as a "one-off" measure to be revoked as soon as possible, but as a stable (by definition) source of public revenue. Finally – though there are many other examples – it would be useful to evaluate the effectiveness, again in the light of international experiences, of the proposals put forward in the government's National Reform Programme (NRP) presented in mid-April to, as announced, "return the country to a path of durable and sustainable growth."

Finally, a point of both procedure and substance: it is to be hoped that, despite his many commitments, Prime Minister Monti will find the time, in his capacity also as Minister of the Economy, to meet with the mission upon completion of its work. The IMF's assessment plays an authoritative role in shaping international confidence, without which this crisis has no exit. It deserves, therefore, attention at the highest level.

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