Supertask for Supermario

Mario Monti, as the whole world knows, is now Prime Minister, but rather than, as one commentator said, being 'put in as the head of the government', he has not yet formed his administration. Today, Monday and tomorrow, Tuesday, will be taken up with getting the views and agreements of both sides. Theoretically, there could still be an election, but nobody wants that (except the people, of course). We don't yet know to what extent there will be politicians (who would be opposed by the other side and therefore have to be balanced out) or just technocrats. Fortunately for Monti two of the senior players, Alfano and Bersani, favour just technocrats. In this context it is believed that Monti would choose university professors. This is not quite as good as it may sound - there is a world of difference between teaching it and doing it and the professors are themselves sometimes political operatives.

Mario Monti

What will Monti do? Imagine Italy were a person, in trouble with his debts. If he isn't to go into bankruptcy, or default, he has to do a number of things.

First, he has to stop borrowing more and more.This means cutting out some expenditure, and it is this which the Europe-inspired austerity plan sought to address. It is worth noting that before Berlusconi fell from grace, Ollie Rehn, the budget commissioner, said that the proposals were not enough. But suppose they were just enough - maybe to balance the budget by 2014 instead of 2013 and that were acceptable - there is then the problem of putting the plan into operation. I have said before that there is no real appetite for austerity in Italy and the people, for all that Europe hopes to bypass them, could cut up rough. Level of difficulty: 6/10.

Next our over-borrowed man needs a little bit of cash to tide him over - particularly for paying the interest on his debts. In Italy's case this liquidity loan (I am not talking about refinancing all its debts) would be around €750 billion, it is estimated. Who's got that kind of money? It's a lot, even for the Chinese. The European Central Bank, that's who (it can print it). But Germany, you may remember, is against the ECB chipping in, saying it is against its Constitution. It would create a core inflation all over Europe. So getting something to tide Italy over may be as difficult as refinancing everything. Level of difficulty 8/10.

Last we need to make sure our man doesn't get into this state again. Since the start of the euro Italy's labour competitiveness has deteriorated by 50% vis-a-vis Germany. On the face of it this means either the Italians need to work for half pay, or they work twice as hard as Germans. Neither of these is remotely possible. But changes can be made. The State is too big in Italy and that means not just that it needs to be financed, it means it interferes in all kinds of areas where it shouldn't. Opening even a shop is a nightmare, you have to register with all kinds of bodies and jump through all kinds of hoops. If you employ more than 15 workers it is impossible to lay some off when business is slow. Trade Unions are entrenched in society and in the law and are far too powerful. And speaking of the law, if you have even a modest trade dispute it is likely to take at least five years to resolve it through the  courts - most people don't bother trying. Even if Monti managed to get agreement to all this, the effect would be of rendering unemployed more than a million State workers, which would push the country into recession which means a bigger overdraft (see above). It would take years to re-employ them in the productive sector (think Britain in the 1980s). Level of difficulty 9/10.

Monti - even if he were Supermario - can't do all this. All he can do, reasonably, is put into place Silvio's commitments to Brussels. Then Silvio, or his PdL party, will say 'that is what we were going to do'. Elections will almost certainly have to be held in 2013 if not earlier, and the PdL is fairly confident it can win them.

The solution to Italy's problems looks increasingly like default, leaving the euro and allowing a massive devaluation, and at the same time putting into place the efficiency measures. It's going to be a bad couple of years.