Paul Krugman has got in early to comment on the political demise of Mario Monti – who now seems certain to trail in fourth in the Italian elections. According to Krugman, Monti’s reputation for wisdom is wildly overblown. On the contrary, he more or less deserves his fate because he was “in effect, the proconsul installed by Germany.”
Worse, according to Krugman, Monti’s policies did not even work. As in the rest of southern Europe, the economy has shrunk and so debt-to-GDP ratios have risen. There was only one “piece of good news” in the Monti era – that “bond markets have calmed down.” However, Monti cannot claim the credit even for this, because it is “largely thanks to the stated willingness of the ECB to step in and buy government debt when necessary.”
As ever, with Krugman, the argument is forcefully made. But it misses out a crucial stage in the argument and therefore unfairly denigrates the role of Monti in stabilising the Italian economy. Remember, when Monti came to power, the steady rise in the interest rates that Italy was having to pay to finance its debt was eating up more and more of the Italian budget. There was a real prospect that Italy might simply be unable to finance itself through the bond markets – and that might have sparked a terminal crisis in the euro.
So the bond markets calming down was not just a little piece of good news – it was absolutely critical. Even if one accepts Krugman’s argument that this was all because of the actions of Mario Draghi’s ECB, you have to ask why Draghi was able to act? And the short answer to that is Mario Monti.
If Berlusconi – or even a spendthrift left-wing government – had been in power in Rome, there would have been very little prospect of Draghi being able to persuade the ECB to promise to buy Italian debt, when necessary. Even if the ECB had wanted to do that, the political outcry in Germany would probably have thwarted any such idea. It was only because Monti commanded the confidence of Berlin (or, as Krugman insultingly puts it, was Germany’s “proconsul) that the ECB was able to act.
It is possible therefore that Mario Monti has now performed the most crucial part of his mission. The ECB’s promise has been made – and is unlikely to be withdrawn, unless a new Italian government begins to behave with utter irresponsibility. But while it may suit Krugman’s anti-austerity stance to denigrate Mario Monti, in fact he played a pivotal role in pulling Italy, and the euro, back from the brink.