Italy's Monti Quits, Setting Up Volatile Race

[tmw89]

ROME--Italian Prime Minister Mario Monti resigned Friday, ending an emergency administration that helped loosen Italy from the grips of Europe's debt crisis through deft international moves, but leaves the euro-zone's third-largest economy still struggling.

Mr. Monti's resignation--following, as expected, parliamentary approval of the 2013 budget law--sets the stage for a tumultuous election season over which the outgoing premier and his government's legacy will loom large.

The raft of economic overhauls and austerity measures adopted under the Monti government has become a lightning rod for criticism among Italy's rowdiest political parties, including Silvio Berlusconi's People of Freedom Party, in the campaign ahead of expected end-February elections.

Mr. Monti is expected to unveil on Sunday a policy road map of measures to improve Italy's economic competitiveness and European stance--a move that could preface his own candidacy in the national vote. For now, the party that is leading in the polls is the center-left Democratic Party, although it is unclear whether the party would be able to get enough votes for a stable majority in parliament.

So far, a group of small centrist parties have rallied around the premier, but polls show support for such an alliance led by Mr. Monti lagging far behind Pier Luigi Bersani and his Democratic Party.

Whoever ends up running Italy next will have to tackle the twin problems that have plagued the country for years: huge debt now at 126% of gross domestic product and slim growth prospects. The next government also may want to ensure that Italy keeps the strong policy voice it has had in Europe over the past year.

Mr. Monti's resignation to Italy's president on Friday night was an orderly and somber affair, compared with the stormy conditions that brought him to power a year ago when former Premier Silvio Berlusconi was forced out of office by the raging debt crisis.

"A year ago this government was at the starting line. Today, instead, we must put an end to our role," Mr. Monti told his staff after attending Mass, according to his spokeswoman. The premier quipped that his resignation was "not the fault of Mayan prophecies."

Mr. Monti will remain in office as the head of a caretaker government until a new administration takes control, according to a statement from Italian President Giorgio Napolitano's office. On Saturday, Mr. Napolitano dissolved parliament, formally setting the stage for general elections in February

Much of the next few weeks of campaigning will be about the effects of the technocrat government's moves over the past year. The government's efforts to rein in Italy's finances and to reassure financial markets relied mainly on unpopular measures, such as raising property taxes and retirement ages--belt-tightening expected to shrink Italy's economy by 2.4% this year.

Cuts to Italy's bloated public sector--a longtime source of public rancor--amounted to only 2.5% of GDP, according to Stefano Manzocchi, an economist at Rome's Luiss University. The failure to make deeper cuts in public spending deprived Mr. Monti of the fiscal slack he needed to stoke growth with measures such as tax cuts.

"In an ideal world, spending cuts should reach at least 5% of GDP, allowing the government to reduce fiscal pressure," Mr. Manzocchi said.

Mr. Monti aims to defend his legacy by entering the fray of Italy's election, though it remains unclear exactly what role he will play in the campaigns. He faces a delicate balancing act as he sheds his technocrat status as an apolitical and impartial steward of the country.

Parties that back Mr. Monti's Sunday policy agenda would receive the outgoing premier's endorsement, according to people close to the premier.

The outgoing premier also is weighing launching an independent political party of ministers from his technical government, one of the people said. But the premier's spokeswoman says Mr. Monti has no immediate plans to create his own party, and the deadline for registering a party is only weeks away.

Mr. Monti, a soft-spoken economist by training, faces a steep learning curve on the front lines of Italian politics. He garnered plaudits from financial markets and EU leaders for his maneuvering at euro-zone summits in Brussels, where he helped wring concessions from Germany that cleared the way for the European Central Bank to act as a backstop for debt-strapped countries.

Italy's election landscape, however, is dominated with outspoken politicians and entertainers such as Mr. Berlusconi and former comedian Beppe Grillo who embrace rough-and-tumble rhetoric and draw upon vast networks of supporters to get out their message. Both men have seized upon Mr. Monti's austerity and the euro as the main culprits of Italy's economic malaise.

"Monti doesn't have a political party to back him up," said Franco Pavoncello, a professor of political science at John Cabot University in Rome. "He'll outline his recipe for the country, and we'll wait and see who is available to work with him."

As Mr. Monti asserts himself on Italy's political stage, his relationship with Mr. Berlusconi--still popular among many center-right voters--has frayed.

Two weeks ago, Mr. Berlusconi's forces in Parliament abstained from backing Mr. Monti, prompting the premier to announce his plans to resign.

Those tensions were evident earlier Friday in the vote to pass Italy's 2013 budget. The Chamber of Deputies, or lower house, approved the budget in a vote of 309 to 55, seven ballots short of an absolute majority in the 630-seat lower house. The shortfall stemmed from five abstentions and 261 absences, many of them from members of Mr. Berlusconi's party.

--Christopher Emsden contributed to this article.