Why Mario Monti Is the Most Important Man in Europe

At first glance, it seems impossible that the fate of the world economy rests in Mario Monti’s hands. The Prime Minister of Italy has the aura of a gentlemanly grandfather — the polite demeanor, the soft voice, the smiling eyes — not the tough taskmaster Italy so desperately needs to escape its dangerous and protracted debt crisis. Monti, 68, speaks in the long, precise, jargon-laden sentences of an academic economist, which he was only four months ago. He does not employ the emotional flourishes or rousing rhetoric of a typical politician. He seems like the sort who’d get chewed up by Italy’s bruising political machine, not reform it.

Listen to what he says, though, and the real Monti emerges. His carefully selected words are edged with steel. He talks not merely of ending Italy’s economic crisis but also of pursuing a sweeping agenda to overhaul a broken nation — setting free the energies of a moribund economy, fixing a deadlocked democracy, charging forward with the lofty goal of European integration. Listen carefully and you realize Monti is not hoping for quick fixes. He’s aiming at nothing less than a wholesale overhaul of Italian society. As he recently told TIME during an interview in the Prime Minister’s stately office in Rome, “I believe that reforms will not really take hold if they do not gradually come into the culture of the people.”

(See TIME’s video interview with Monti.)

Monti’s mission matters to everybody — from Wall Street financiers to Chinese factory workers. That’s because Italy’s problems have become the world’s problems, and Monti must fix Italy to prevent another global financial crisis. His most pressing issue is the precarious state of Italy’s national finances. Profligate politicians, thinking more about votes than about the nation’s health, amassed a mountain of government debt equivalent to more than 120% of GDP — the second highest level in the euro zone, after that of troubled Greece.

But Italy’s difficulties run even deeper. The Italian economy has consistently under-performed, even before the onset of the Great Recession. From 2000 to ’07, Italy’s GDP grew at an average annual rate of 1.5%, compared with nearly 2.2% for the euro zone overall. Tied up in regulatory knots, the economy doesn’t foster entrepreneurship or create enough good jobs for young workers. Though Italy’s economic woes are nothing new — the country had puttered along for years — when the contagion from the European debt crisis struck, it focused investors on Italy’s enfeebled condition. In mid-2011 they began fleeing from Italian government bonds, sending 10-year yields past 7%, a level that would eventually become too expensive to bear. To the horror of world leaders, the terrifying possibility emerged that Italy — the euro zone’s third largest economy — could default or require a large-scale bailout.

(See how Monti may get his way with politicians.)

And as Italy goes, so goes the euro. Though the debt crisis in Europe has been raging for more than two years, Italy looms as the biggest threat to the embattled shared currency’s survival, because Italy is paradoxically both too big to fail and too big to save. Although Europe rescued Greece, Ireland and Portugal, a bailout of Italy would require such huge sums — by one estimate, $900 billion — that its neighbors, including giant Germany, would likely be unable, financially or politically, to ante up the cash. Yet if Italy tumbles into insolvency, it could set off a chain of events that unravels the monetary union and puts Europe’s even grander half-century-long democratic-integration experiment in peril.

Monti’s success is just as crucial for the global economy. The consequences of an Italian default — and even worse, the collapse of the euro — are almost unimaginable. Italy could spark a financial crisis even more destructive than the one tipped off by the 2008 Lehman Brothers bankruptcy. Shock waves would ripple through global financial markets to every corner of the world, sinking banks and economies along the way. A recession in Europe, home to hundreds of millions of rich consumers, could derail the U.S. recovery and dampen emerging markets. Even now, as growth in Europe slows, factories in China are feeling the pinch. The fates of Mario Monti, Europe and the worldwide recovery have become inexorably entwined.

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The Full Monti
Monti ended up in this position through one of the more unusual twists in modern European governance. His predecessor, the colorful Silvio Berlusconi, had dominated Italian politics for a decade, but as the crisis spiraled in late 2011, he proved unable to rally the country’s politicians to tackle it. Budget cuts and reform attempts were too late and too pathetic to rebuild investor confidence. Discredited, Berlusconi resigned in November. The failure, though, was not his alone. Italy’s political establishment woke to the reality that partisan politics had failed the nation. Both the left and right “have a minimum common denominator,” says Pier Ferdinando Casini, leader of the Union of the Center political party. “They are both incapable of doing the reforms. We are afraid of losing votes.”

(See pictures of Berlusconi’s career.)

The solution was Monti. Italy’s President, Giorgio Napolitano, called on him to step in and run the government. The Yale-educated economist was president of Milan’s Bocconi University, and he had studiously avoided the corrupting influence of Italian domestic politics throughout his career. But, he says, the request to serve came “at such a severe time of crisis for Italy that I could not refuse.”

Today he reigns over Rome like a new Caesar. In effect, the democratic process has been suspended to allow an un-elected technocrat to implement policies that elected politicians could not. Monti calls it a “temporary mutual disarmament” of the left and right. Nearly all the major political parties set aside their differences and threw their support behind him, and that has given Monti almost uncontested control of the nation’s decisionmaking. “What we have been able to realize is an Italian miracle,” says Casini. “The fear of catastrophe has pushed everybody into a truce.” The parties’ motivation is, in part, cynical. They hope Monti will do the dirty work of introducing painful reforms so they don’t run the risk of alienating their constituencies. So far, though, the general public — eager for firm leadership in a time of crisis — has embraced Monti as well.

Monti has used his mandate to the fullest. In December he implemented a biting austerity program of tax hikes and spending cuts, aiming to balance the budget by 2013, and a reform of the country’s pension system, with phased increases in the retirement age. In January he announced a sweeping liberalization of professions regulated and protected from open competition, like pharmacists, taxi drivers and lawyers. Next on the agenda is a major overhaul of the distorted labor market to make it more flexible and create jobs for the nation’s army of unemployed youth. By dismantling these hurdles to open markets, Monti is hoping to increase efficiency, boost growth and ultimately put a permanent end to Italy’s debt crisis. His efforts have already had an impact. Bond yields have fallen by about 1.5 percentage points since Monti took charge, to (a still elevated) 5.6%, easing fears of an imminent European meltdown. Although much work remains, Polish central bank president Marek Belka has already declared Monti “the hero of modern Europe.”

(Read “Regime Change in the Euro Zone: Can Fresh Leaders Fix the Debt Crisis?”)

Conflicts with Interest
Not everyone is enthralled. Monti is taking on entrenched interest groups that have repeatedly defended their privileges — and they’re not going down without a fight this time. Taxi drivers staged strikes in Rome and other major cities. Pharmacists are threatening to do the same. Truckers blocked roadways to protest a fuel-tax hike. The country’s unions are gearing up to challenge Monti’s labor reform.

To many in Italy, Monti’s reform agenda is radical, even dangerous. They don’t share his belief that competition can create jobs and growth, and they favor Italy’s current system, rooted in the supposedly equalizing forces of social protection, state aid and regulated capitalism. “In Italy, the economy was more based on rules that used to be applied to create wealth for the general public,” says Loreno Bittarelli, president of Uritaxi, a national taxi union, which is opposed to Monti’s program. “I don’t understand why suddenly the only solution (to the crisis) is to get rid of the rules.” To Monti’s opponents, his reforms are no more than a ruse to allow wealthy corporations to steamroll small businessmen. “The real goal of this government of bankers is to impoverish pharmacies so they can become the victims of banks,” says Annarosa Racca, president of Federfarma, a pharmacy association. Monti’s enemies see him as an elitist, unsympathetic to the struggles of middle-class Italians. “Monti has always lived in the salons,” says Bittarelli. “He really doesn’t know the problems of ordinary people.”

Monti’s response might be a surprise. “Maybe they’re right,” he says. Though he has attempted to appeal to the masses — he refused to accept his Prime Minister’s salary, in a spirit of shared sacrifice — he cannot honestly claim to be a man of the people. His father was a banker, and Monti was once an adviser to what some see as the quintessence of rapacious capitalism: Goldman Sachs. He has not run in any election for any office, and his friends think he never will. Monti, though, believes his detachment gives him an edge. The cozy relationship between politicians and their constituents, he argues, is the exact source of the nation’s woes. “Italy has piled up huge public debt because the successive governments were too close to the life of ordinary citizens, too willing to please the requests of everybody, thereby acting against the interests of future generations,” he says.

And don’t expect him to bend. Monti has a long history of taking on powerful people and coming out on top. When he was Commissioner for Competition at the executive body of the European Union from 1999 to 2004, he earned his nickname, Super Mario, for butting heads with some of the world’s most influential businessmen, from Microsoft CEO Steve Ballmer to former General Electric CEO Jack Welch. In 2001, Monti squelched a merger between General Electric and Honeywell, charging that the combination would smother competition in the aviation-equipment industry. Monti came under intense pressure from the U.S. to change his mind — Paul O’Neill, then U.S. Treasury Secretary, labeled his stance “off the wall” — but Monti refused to blink. Welch describes him as “cold-blooded.”

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Indeed, colleagues say he conducts his battles with almost unflappable ease. “He never lost his temper, even in the most tense meetings when threats were hurled across the table,” remembers Tilman Lüder, Monti’s spokesperson while at the E.U. Angelo Cardani, an economics professor at Bocconi, says that in his 10 years working with Monti at the E.U., he recalls Monti raising his voice in anger at him only once. “I was terrified,” he says.

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The Danger of Success
Ironically, the more successful Monti becomes, the more trouble he might face. The country’s politicians have backed him only because of the economic crisis, so the more reforms he implements, and the further Italy pulls back from the brink, the less incentive they have to support him. As austerity measures begin to hurt, his popularity could also begin to evaporate. That potentially leaves Monti with a very narrow window of opportunity to implement change. In theory, he will remain Prime Minister until the next election, in the spring of 2013 — barely enough time to fulfill his agenda — but he could find that window closing long before then. “The point is how to keep this pressure [to reform] even once the most visible elements of emergency hopefully are over,” Monti says.

(Read “Monti to the Rescue: But Is the Technocrat Italian Enough to Save Italy?”)

He could use a bit more help from the rest of Europe. For Monti, the future of Italy and the future of Europe are intrinsically connected. He has always been a passionate advocate of European integration and has consistently pressed for more of it. “Among the E.U.’s big member states, he is the leader who is most European in his thinking,” says Jean Pisani-Ferry, director of the Brussels-based think tank Bruegel, which Monti helped found in 2005.

His stance has at times put him at odds with other European leaders. In an influential 2010 report, Monti scolded the members of the E.U. for stifling the region’s growth potential by preventing the emergence of a true single market with too many remaining national barriers to cross-border business. To quell the debt crisis, he advocates deeper European integration than many of his counterparts are willing to accept. In his TIME interview, Monti expressed gratitude for the support given to him by the rest of Europe but lamented that faster euro-zone reform might have blunted some of the worst effects of the crisis. An unwillingness to devote sufficient resources to expand the zone’s bailout fund, for example, has hampered the creation of a so-called firewall to protect Italy and other struggling countries from contagion. Monti also favors the introduction of Eurobonds, which would be backed by all euro-zone governments, though other European leaders have been fiercely opposed to the idea. However, the bickering that has stymied such action, he believes, may finally be coming to a close. “I think there is a genuine wish on the part of the E.U. and Germany and France to again play an active game with Italy for a relaunch of European integration,” he says. “I think we will be seeing an acceleration of the good news.”

He’s seeking more good news in the U.S. On Feb. 9, Monti has a high-profile summit with President Obama, then he is off to New York City for meetings with the American financial community. To solve Italy’s debt crisis, Monti needs to sell his agenda abroad as doggedly as at home. If he can convince global investors that Italy is truly reforming and is a safe place for their money, he will alleviate any fears of an Italian default. “One of the key purposes of this visit would be to further try to explain to the President and to the financial community what we are trying to achieve,” Monti says.

(See pictures of Barack Obama’s college years.)

That accomplishment alone would solidify Monti’s status as the man who’s saving Europe. Italy’s problems, though, run so deep that reform will need to continue long after he exits the scene. Monti hopes his administration can act as an example for his successors of the magical benefits of the spirit of compromise. “Others will come,” Monti says, and they will sense that public opinion no longer tolerates daily political conflicts whose objective is “to destroy your adversary and not to save the country.” Italy and the entire global economy can only hope that is true.
— with reporting by Stephan Faris / Rome; Leo Cendrowicz / Brussels; and Milena Vercellino / Milan

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