Italian Prime Minister Mario Monti is full of optimism these days. He has claimed to achieve “historic” reform in Italy’s labor market and to beat the “financial aspect” of the ongoing economic crisis. This is nothing more than political hubris.
Despite all the grandstanding and high rhetoric, the Italian labor market still remains broken and the resurgence in Italian bond yields over the past several weeks signal another impending beating from markets.
As I explain in the City A.M., Monti’s recent labor reforms do not free entrepreneurs from the regulatory straightjacket that has been suffocating them since the 1970’s.
The government and party leaders came to a fragile agreement with Italy’s largest unions. Businesses would be allowed to lay off workers for “economic reasons,” meaning financial distress, while paying up to an exorbitant 24 months of severance. But firms still would not be allowed to fire employees for incompetence.
The centerpiece of Italy’s rigid labour market, and the main issue of contention, is Article 18 of the Worker’s Statute. Under it, “poor performance” is not grounds for employee dismissal. Only “concrete and wanton negligence” justifies that. If a labour court finds a business guilty of firing an incompetent employee, the firm must rehire the worker and compensate for lost pay. If an entrepreneur has fewer than 15 employees, he faces a choice between rehiring or paying up to 14 months of severance. Article 18 protects 87 per cent of private sector workers, according to numbers from Datagiovani – a statistical agency that studies Italian youth.
Entrepreneurs are afraid to grow. Within the EU, Italy boasts the highest proportion of employment in both micro-firms – businesses with fewer than 10 employees – and micro and small firms combined. It also faces the lowest proportion of employment in medium-sized enterprises.
Monti shouldn’t take all the blame, however. Italy has some of the most powerful and intransigent trade unions around. Back in February before the labor reform battle began, I predicted in The Wall Street Journal that Monti and his cabinet would encounter strong opposition and a formidable unwillingness to compromise from unions.
[M]ost past attempts at reform have run up against Italian politicians’ cowardice in taking on the country’s powerful unions. Mr. Monti and Ms. Fornero are setting the stage for a major battle this month, when they will try to reform Article 18 as well as other archaic labor laws that have been an anchor on Italy’s growth for almost half a century.
Mr. Monti and Ms. Fornero will encounter enormous opposition, and success is by no means guaranteed.
Monti’s recent reforms are a kowtow to unions. It’s unfortunate that he — like his predecessors — lacked the courage to confront the protagonists that have kept Italy’s economy in a vice grip for decades.
Meanwhile, Italy’s stagnation continues.