What's Italian for Reform?

Editorial do WSJ

Answer: Chasing tax revenue at the expense of economic growth.

Now that Nicolas Sarkozy and Angela Merkel have announced that they will seek a new treaty to refashion economic governance in the euro zone, what remains to be seen is if the new Brussels rules are merely a rewrite of the old mindset. The "new" budget measures announced in Italy suggest the old game is far from over.

Italian Prime Minister Mario Monti unveiled a €30 billion plan Sunday to get the country's public finances under control. Unfortunately for Italy and the euro zone, Mr. Monti's measures are long on tax hikes and short on serious reform. The newly appointed premier seems intent on following Greece down the EU/International Monetary Fund-mandated road of chasing tax revenue at the expense of economic growth.

Mr. Monti's proposals come in the form of an emergency decree, which means he can start implementing them before the Parliament approves them. They include a two-percentage-point hike in the value-added tax rate to 23% (U.S. consumption taxers take note), the reinstatement of a property tax repealed in 2008, and not least a 1.5% tax on income repatriated under a previously announced amnesty program.

Set against this are an increase in the retirement age to hold down the cost of pensions for Italy's rapidly graying population and tax incentives for businesses that hire women and young people. Youth unemployment in Italy approaches 30%.

Making it marginally cheaper to expand payrolls is useful, but it does nothing to address the Italian labor market's fundamental problem—the inability of firms to lay off workers if they employ 10 people or more. The supposed right to a job for life, enshrined in Italy's Article 18, is the single biggest obstacle to rationalizing the Italian economy.

Mr. Monti's proposal to increase the retirement age to 62 for women and 66 for men, from 60 and 65, respectively, will help to slow the growth of Italy's pension bill, currently some 14% of GDP. Italy's demographics make it the second-oldest country in the world after Japan. But it will be years before the pension reform is fully phased in.

Some ideas that Mr. Monti overlooked in his initial sortie deserve serious consideration. Liberalizing entry into the retail market, where productivity is low and costs high, would help modernize an industry still dominated by small, inefficient shops. A decade ago, the planning process for approving new stores was delegated to Italy's regional governments, and the areas since deregulated have outperformed the more restrictive provinces.

The new EU treaty promised Monday by Mr. Sarkozy and Mrs. Merkel would give Brussels bureaucrats more control over national budgets, a move that is supposed to ensure better economic management within the euro zone. But the EU's economic prescriptions in the current crisis have not been encouraging. The Monti reforms merely reflect a familiar Brussels mindset that values short-term tax revenue over long-term prosperity.