Monti Revamps Italy’s Labor Rules

Prime Minister Mario Monti will impose a plan to ease firing rules, risking strikes and protests, as he seeks an overhaul of Italy's labor markets to fuel the economic growth needed to trim Europe's second-biggest debt.

Monti told unions and employers last night in Rome there would be no more discussion of his plan to allow companies more leeway to fire workers when economic times turn bad. The government may pass the measure by decree, meaning the plan would be enacted immediately before securing parliamentary passage.

The labor overhaul marks Monti's fourth legislative push since coming to power in November to shore up public finances and spur an economy that's lagged behind the euro-region average for more than a decade. His efforts, plus unlimited lending by the European Central Bank, have helped Italian bonds gain 13 percent this year, the biggest advance in the euro area.

“There is no question in my mind that the rigid labor market is one of the main reasons why the Italian economy has performed so poorly,” said Riccardo Barbieri, chief European economist at Mizuho International Plc in London. An agreement would be “an important sign of what Monti can achieve in terms of structural reform, but there are still many difficult challenges ahead,” he said.

Monti, 69, has said that only by unlocking Italy's economic potential will the country be able to trim a debt of $2.5 trillion, more than Spain, Ireland, Portugal and Greece combined. After taking over from Silvio Berlusconi on Nov. 14, Monti passed a $20 billion-euro austerity package to balance the budget next year. He followed with measures to open closed professions and reduce bureaucracy before tackling labor reform.

The yield on Italy's 10-year bond rose 3 basis points to 4.93 percent at 9:40 a.m. in Rome. That's down more than 2 percentage points since Monti's arrival. The rate on German bunds of similar maturity was 2.06 percent.

The ECB did its part to bring down yields by lending more than 1 trillion euros ($1.3 trillion) to the region's banks, giving them cash and helping shore up demand at sovereign debt auctions. Italy sold 5 billion euros of three-year debt on March 14 at 2.76 percent, the lowest yield since October 2010.

“The market is working on the assumption that Monti will deliver on the reform agenda,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.

Political Tension

Union opposition could complicate passage of the plan in parliament should the Democratic Party, which is closest to the union opposing the measure, waiver in their support for Monti.

“That appears to be complicating factor, said Richard McGuire, senior fixed-income strategist at Rabobank International in London, said. “The largest union's close connection with the Democratic Party means there is some risk of the emergence of an opposition to Monti's reforms that we haven't seen so far in the early stages of this technocratic government's tenure.”

Attempts to overhaul the nation's rigid labor laws have vexed other Italian leaders. Berlusconi backed down from his attempts to ease firing rules in 2002 after millions of Italians took to the streets in protest and militants murdered Marco Biagi, an adviser to the government on labor policy who was gunned down outside his home on Father's Day.

The thorniest part of the talks involved Monti's efforts to rework Article 18 of the labor code, which bans dismissals without just cause and forces employers to rehire and compensate workers deemed unfairly released. By making it difficult to fire even during economic downturns, employers say the rule discourages hiring when times are good.

With unemployment at a decade-high 9.2 percent, convincing unions that easing firing rules will help create jobs has been a tough sell.

“The government, after having said that it didn't consider Article 18 central to the reform, only asked for a conclusive opinon from all the parties about making firing easy,” Susanna Camusso, head of the CGIL, the country's biggest union, said after the talks broke down. Camusso will hold a press conference at 3 p.m. in Rome to announce their strategy on fighting implementation of Monti's plan.

German Reform

Economists point to Germany's overhaul of its labor market rules a decade ago as an example of how employment and economic growth can benefit from more flexibility. Chancellor Gerhard Schroeder pushed through a labor market overhaul in 2003 that loosened hiring and firing rules and reduced long-term jobless benefits to spur people to look for work.

Chancellor Angela Merkel has repeatedly credited those changes with helping reduce unemployment from a post World War II high of 12.1 percent in March 2005, six months before she took office, and the current rate of 6.8 percent, the lowest in the two-decades of the reunified Germany.

Germany's economic growth has averaged 1.1 percent since 2003, while Italy expanded an average of 0.3 percent over the period.

Bloomberg News

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