While a fiscal cliff threatens to tip the U.S. into recession in 2013, Congress members have gone home to appeal to voters (and put off fiscal policymaking). Meanwhile, President Obama and Mitt Romney launch attacks and counterattacks in the hopes of winning over particular voting blocs. For anyone who's ever dreamed of policymakers not constrained by campaigning, Italy shows the benefits and dangers of that situation.
Since his appointment in November, Italian Prime Minister Mario Monti has enacted dramatic changes that have reshaped his country's fiscal policy. He has raised taxes, reformed the nation's pension system, and even gave up his own salary as part of the nation's belt-tightening. And his nation needs the tightening, with public debt currently at around 123 percent of GDP.
"He singlehandedly saved that country and the euro zone," says Scheherazade Rehman, director of the European Union Research Center at George Washington University's School of Business. That's high praise, given that Italy is a large economy with what Rehman considers "deep problems."
"It would be nice to see him continue for another couple of years," she says.
Monti is what is known as a "technocrat"—an appointed expert (in this case, an economist) brought in to lead the nation. He came in to replace famously scandal-ridden former prime minister Silvio Berlusconi. The man called "Super Mario" in European news media helped to improve Italy's reputation both within the European Union and with investors; his policies at first helped to send Italian borrowing costs downward.
And even amid his cutting, he has also been a strong EU advocate of pro-growth policies.
Monti's bold and quick reforms may sound great in the U.S., where lawmakers deadlocked over spending continue to put off tough choices. The uncertainty over the outcome of the fiscal cliff has led some businesses to hold off on hiring may even lead to layoffs.
Still, even well-educated experts can't fix everything. Italy's central bank reported this week that the nation's public debt hit a record high in June, and its borrowing costs have risen again, with the yields on Italian 10-year bonds near a disturbingly high 6 percent. The IMF earlier this year predicted that Italy's debt-to-GDP ratio would remain at 119 percent of GDP even in 2017.
Beyond its government's debts, Italy's economy is still far from healthy. Today, the European Union's statistics office announced that the collective GDP drooped by 0.2 percent in the second quarter, led in part by Italy's 0.7 percent contraction.
"He's running out of firepower. ... His effectiveness is slowing down," says Rehman, pointing out that one man can only do so much.
And his tenure is almost up, with Italian elections scheduled for 2013. This leads to another key problem with technocratic governments: Even if they happen to be successful (a big if), they must give way to politics as usual at some point.
"It's not a situation that could last forever," says Martin Schwerdtfeger, senior international economist at TD Economics. "It can help you to calm the situation for a while, but then you have to make room to have a newly elected government. It's not the ideal way in which a country should be run."
And a public frustrated with austerity measures could easily choose a government that will not be as willing to keep spending in check as Monti has been. And if the debt burden of the third-largest European economy grows too large, the results could shake the global economy.
"Italy really is too big to fail in the euro zone, and everyone is well aware of that," say Rehman.
Applying the situation to the U.S. requires clearing all sorts of mental and rhetorical hurdles. For example, it's nearly unimaginable that the U.S. would appoint a Krugman or a Greenspan to head the government. The U.S. doesn't have a broader, international monetary union to consider in its decisions. And while U.S. debt levels are high, U.S. treasury bonds are still considered a safe investment.