Economist to govern Italy

ROME – Eager to win back confidence from financial markets, Italy’s president appointed economist Mario Monti on Sunday to lead the country’s new government. The move came almost 24 hours after Prime Minister Silvio Berlusconi submitted his resignation amid widespread celebration on the streets of Rome.

President Giorgio Napolitano’s announcement sets the stage for Monti, a former European Union commissioner, to form a new technocratic government that will try to navigate Italy out of the debt crisis with austerity measures sought by the European Union. The EU is demanding Italy cut public spending, reform its pension and take other steps to reduce the nation’s $2.6 trillion public debt and spur growth in the world’s eighth-largest economy.

Italy has been at the eye of the eurozone’s debt storm in recent weeks, along with Greece, as investors grew increasingly anxious about Berlusconi’s leadership and the fractured Parliament’s capacity to come together on a package of economic reforms.

Berlusconi, 75, faced intense pressure to step down after Italy’s cost of borrowing jumped sharply. With another round of bond auctions coming up this week, Napolitano and other Italian leaders were keen to announce a new government leadership before markets opened this morning.

“The key is the conviction markets have in a Monti administration and its ability to enact reforms,” said Paul Donovan, a global economist at UBS Investment Bank in London. He said it’s likely investors will react positively but cautioned that it hardly means the EU’s debt crisis is over.

“I think the attention may shift elsewhere,” he said. “France is a key focus for investors.”

The appointment of Monti, which was expected, came after consultations with various parties and factions, suggesting that he had enough backing from lawmakers to govern. Monti is expected to name a team of non-politicians to his Cabinet.

Some members of Berlusconi’s center-right party, however, argued for an early election rather than allowing the government of technocrats to continue into 2013. Other critics argued that a Monti administration would have trouble succeeding because it lacked electoral legitimacy.

Monti, however, has received tacit if not direct backing from EU and international leaders, including Christine Lagarde, the head of the International Monetary Fund, which will soon begin tightly monitoring Italy’s progress in making reforms.

“I think the change with Monti will bring Italy in safe waters,” said Romano Prodi, a former Italian prime minister who also served as president of the European Commission.

Prodi described Monti as a serious economist who knows not just abstract economics but the real world of quantities. “When he takes a decision, he has this matrix in his head,” Prodi said in a telephone interview Sunday from his home in Bologna. “He ponders the pros and cons. … He has calm blood.”