March 29, 2012

Monti Labor Law Split Poses Risk for Investors

Disagreement within governing coalition boosts political unrest

Even as Prime Minister Mario Monti of Italy pushed through a plan to make it easier to fire workers, a split within his governing coalition over the measure could endanger his government even before elections are held by May. And that, in turn, could boost risk for investors.

Bloomberg reported that the change in labor laws to allow easier firings in a high-unemployment atmosphere was not popular to begin with, either with labor unions or with the Democratic Party, a member of the three-party coalition. Still, Monti managed to pass this fourth major change to try to avoid economic meltdown—but Democrats, having second thoughts on the matter, are now talking of reversing the measure in Parliament.

Marc Ostwald, a fixed-income strategist at Monument Securities in London, was quoted saying, “The labor market reforms are critical for Italy, and it is equally no surprise that Monti is having a rather more difficult time in getting agreement on these. He has already had to make a lot of concessions and the Italian bond market does appear to be rather sensitive to any negative related news.”

So far Monti has pushed through, in addition to the labor change, a 20-billion-euro ($26.5 billion) austerity plan to eliminate the deficit, a measure designed to boost competition and a set of changes intended to cut red tape. While thus far Monti’s government has seen the rate on bonds fall substantially, that could change if the stability of his government is threatened.

On March 23 his cabinet passed the labor measure, which makes it easier for employers to shed workers for economic reasons without having to worry about a court-ordered reinstatement of fired employees. Employers had blamed those rehire court orders for their reluctance to add new employees in a better economic climate, because it would be difficult to let them go if there were another downturn.

Both employers and unions wrangled over a possible change in this rule for two months without agreement. Monti imposed the measure, saying that it eliminated employers’ excuse not to hire, but the next day the union CGIL called a strike and the Democrats raised the possibility of reversing the measure.

Pier Luigi Bersani, the head of the Democratic Party, argued for the change, and was quoted saying, “It’s inconceivable that there will only be economic compensation. This is a fundamental point, otherwise the narrative isn’t ours, it’s not European, but American. Everyone says that things work better in Germany”—German judges can reinstate workers for economic reasons—and therefore, he continued, markets should not object if, instead of adopting an American employment model, Italy adopts the German model.

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