Prime Minister Mario Monti will impose a plan to ease firingrules, risking strikes and protests, as he seeks an overhaul ofItaly's labor markets to fuel the economic growth needed to trimEurope's second-biggest debt.

Monti told unions and employers last night in Rome there wouldbe no more discussion of his plan to allow companies more leeway tofire workers when economic times turn bad. The government may passthe measure by decree, meaning the plan would be enactedimmediately before securing parliamentary passage.

The labor overhaul marks Monti's fourth legislative push sincecoming to power in November to shore up public finances and spur aneconomy that's lagged behind the euro-region average for more thana decade. His efforts, plus unlimited lending by the EuropeanCentral Bank, have helped Italian bonds gain 13 percent this year,the biggest advance in the euro area.

“There is no question in my mind that the rigid labor market isone of the main reasons why the Italian economy has performed sopoorly,” said Riccardo Barbieri, chief European economist at MizuhoInternational Plc in London. An agreement would be “an importantsign of what Monti can achieve in terms of structural reform, butthere are still many difficult challenges ahead,” he said.

Monti, 69, has said that only by unlocking Italy's economicpotential will the country be able to trim a debt of $2.5 trillion,more than Spain, Ireland, Portugal and Greece combined. Aftertaking over from Silvio Berlusconi on Nov. 14, Monti passed a $20billion-euro austerity package to balance the budget next year. Hefollowed with measures to open closed professions and reducebureaucracy before tackling labor reform.

The yield on Italy's 10-year bond rose 3 basis points to 4.93percent at 9:40 a.m. in Rome. That's down more than 2 percentagepoints since Monti's arrival. The rate on German bunds of similarmaturity was 2.06 percent.

The ECB did its part to bring down yields by lending more than 1trillion euros ($1.3 trillion) to the region's banks, giving themcash and helping shore up demand at sovereign debt auctions. Italysold 5 billion euros of three-year debt on March 14 at 2.76percent, the lowest yield since October 2010.

“The market is working on the assumption that Monti will deliveron the reform agenda,” said Silvio Peruzzo, an economist at RoyalBank of Scotland Group Plc in London.

Political Tension

Union opposition could complicate passage of the plan inparliament should the Democratic Party, which is closest to theunion opposing the measure, waiver in their support for Monti.

“That appears to be complicating factor, said Richard McGuire,senior fixed-income strategist at Rabobank International in London,said. “The largest union's close connection with the DemocraticParty means there is some risk of the emergence of an opposition toMonti's reforms that we haven't seen so far in the early stages ofthis technocratic government's tenure.”

Attempts to overhaul the nation's rigid labor laws have vexedother Italian leaders. Berlusconi backed down from his attempts toease firing rules in 2002 after millions of Italians took to thestreets in protest and militants murdered Marco Biagi, an adviserto the government on labor policy who was gunned down outside hishome on Father's Day.

The thorniest part of the talks involved Monti's efforts torework Article 18 of the labor code, which bans dismissals withoutjust cause and forces employers to rehire and compensate workersdeemed unfairly released. By making it difficult to fire evenduring economic downturns, employers say the rule discourageshiring when times are good.

With unemployment at a decade-high 9.2 percent, convincingunions that easing firing rules will help create jobs has been atough sell.

“The government, after having said that it didn't considerArticle 18 central to the reform, only asked for a conclusiveopinon from all the parties about making firing easy,” SusannaCamusso, head of the CGIL, the country's biggest union, said afterthe talks broke down. Camusso will hold a press conference at 3p.m. in Rome to announce their strategy on fighting implementationof Monti's plan.

German Reform

Economists point to Germany's overhaul of its labor market rulesa decade ago as an example of how employment and economic growthcan benefit from more flexibility. Chancellor Gerhard Schroederpushed through a labor market overhaul in 2003 that loosened hiringand firing rules and reduced long-term jobless benefits to spurpeople to look for work.

Chancellor Angela Merkel has repeatedly credited those changeswith helping reduce unemployment from a post World War II high of12.1 percent in March 2005, six months before she took office, andthe current rate of 6.8 percent, the lowest in the two-decades ofthe reunified Germany.

Germany's economic growth has averaged 1.1 percent since 2003,while Italy expanded an average of 0.3 percent over the period.

Bloomberg News

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