The fear about using the ECB to rescue the Italian bond market from a run was that doing so would give up a golden opportunity to use a market panic and a budget crisis to force the Italian government into serious structural reforms. It turns out that having booted Silvio Berlusconi from office and installed a government of “technocrats” they’re getting a blend of tax hikes and spending cuts and no reforms, that’s no different than what they could have gotten from Berlusconi. It turns out, among other things, that the European Central Bank can’t repeal the basic rules of Italian politics, “the Monti government bowed to pressure from the right — most notably from the party of the former prime minister, Silvio Berlusconi — and dropped some elements of the $40 billion package of spending cuts and revenue increases, including a wealth tax and the speedy liberalization of closed professions like taxi drivers and pharmacists, a plan that drew protests from their powerful guilds.”
For my part, I’ll add that one thing I admire about Italy is that the Italian political system properly understands cartelization of professional services as a “right-wing” policy initiative that’s regressive in its implications. So good for them. In budgetary terms, tax hikes and spending cuts are probably only going to make things worse. Italy was running a primary budget surplus. Worries about its interest payments are either worries about it losing the backing of its central bank, or worries about long-term growth. Raising taxes and cutting spending will not increase Italy’s long-term growth. If they cause the central bank to step up and do its job, that’s all to the good, but the central bank should have done its job properly in the first place. Meanwhile, note that it’s not as if Italy has made no steps to reform its economy and increase competition, but these reforms normally happen when demand is high and reform is the only way to produce non-inflationary growth. Mass unemployment is not going to be a friend of reform.