MARIO MONTI thought he had broken the curse famously summed up by Jean-Claude Juncker, Luxembourg’s prime minister: “We all know what to do, we just don’t know how to get re-elected after we have done it.” Mr Monti pushed austerity and reform and, as European leaders applauded, opinion polls for a while suggested Italians trusted him. But when the professor tried to make the transition from appointed technocrat to elected leader, his centrist coalition barely scraped a tenth of the vote.

There are two messages from Italy’s election. One is a repudiation of a discredited political caste. The other is a rejection of austerity. “The bell also tolls for Europe,” declared Pier Luigi Bersani, leader of the centre-left Democratic Party. Leaving the euro would be a catastrophe for Italy, he added, but Europe had to abandon its obsession with budgetary rigour. His sentiments were quickly echoed by the French Socialist government.

 
Will the mess in Italy change Europe’s attitude to deficit-cutting? Probably not much, beyond lip-service to growth and jobs. One reason is that Angela Merkel, the German chancellor, is unlikely to shift ground before her federal election in the autumn. Another is that the price for German concessions on the euro will be even more control of national budgets, not less. But a third reason is that Berlin and Brussels have convinced themselves that their medicine is beginning to work.

Before the Italian election, the euro had returned to a semblance of calm (largely thanks to Mr Monti’s compatriot, Mario Draghi, at the European Central Bank). The threat of break-up had been averted. Bond spreads had narrowed. Imbalances were being redressed. Confidence was returning.

With luck, growth would follow. This is too rosy a picture. Even so, the first response of the “austerians” to the Italian vote has been to insist that whoever succeeds Mr Monti must keep strict budgetary discipline.

Certainly, worries about financial contagion persist. Nervousness about Italy may infect other countries, especially Spain. And the ECB’s threat to intervene in bond markets to an unlimited extent may yet have to be put into practice. Some fret about political contagion as well. The bounceback by Silvio Berlusconi and the rise of Beppe Grillo may resemble a comic opera. But in different guises, hostility to the EU lurks in most countries.

When Greek voters threatened to reject the Brussels consensus last May, the threat of being chucked out of the euro persuaded them, in a second election, to choose mainstream parties willing to submit to creditors’ demands. Although harder to bully and blessed by a primary budget surplus (ie, before interest payments), Italy may come under such pressure from financial markets that it too will fall in with European orthodoxy.

In truth Europe’s debate is not so much over whether fiscal rebalancing is needed but over how fast to do it. A new paper by Paul De Grauwe, a Belgian economist who is now at the London School of Economics, argues that panic has pushed some governments into unnecessarily deep austerity that has created more unemployment, greater poverty and political resentment over the “shackles imposed by the euro”. But even he accepts that belt-tightening is necessary in southern European countries.

Similarly, a dispute between the IMF and the European Commission over “fiscal multipliers”, which show how austerity affects output, is more nuanced than may appear. Studies by the IMF conclude that forecasters have consistently underestimated the multipliers during the euro crisis. At times of extreme economic stress, tax rises and spending cuts have a bigger impact on growth. Olli Rehn, the EU’s economics commissioner, responded testily that the debate “has not been helpful and has risked to erode the confidence we have painstakingly built up”.

In reality, the IMF does not question the need for fiscal consolidation, and the commission has quietly relaxed its deficit targets. These are now calculated in “structural terms to take account of the effects of recession. France is forecast to miss this year’s budget-deficit target but is likely to be granted a year’s grace. Reckoning the correct tempo of deficit-cutting is an uncertain business. Multipliers may change with time and with country.

Countries that use the euro can more easily be pushed closer to default because the ECB does not wholeheartedly act as a lender of last resort. Yet few can predict when markets will decide that a country is in trouble. For those that have been bailed out, going more slowly on austerity necessitates bigger loans from creditors (who are unlikely to agree to them). And for countries close to losing market access, cutting the deficit may send a reassuring signal to investors. Would anyone have believed a promise by Mr Berlusconi, say, to cut spending in five years’ time?

The real criticism of the euro zone’s response is that it took too long to deal with its fundamental defects. It was not until last year that it acknowledged that Greece was bust and had to write off much of its debt; or that the ECB must stand more credibly behind solvent sovereigns; or that the financial system had to be stabilised through a “banking union”. Had all of these things been done sooner, the crisis might not have become so grave. And perhaps austerity might not have been so severe.
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A failure made in Italy
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The euro zone has much left to do. But Italy’s underlying problems are home-grown. Above all, it needs growth-enhancing reforms in everything from its labour market to its sclerotic justice system.

Italy joined the euro without learning how to survive the loss of its traditional expedients of inflation and devaluation. Its woeful economic performance, and its huge build-up of debt, were chronic ills long before the euro crisis struck and austerity was imposed. Whoever takes power after Mr Monti must, if he wants to save Italy, face up to that awkward fact.