Finally, an Italian government

By Mike Peacock
April 29, 2013

A weekend packed with action to reflect on with more to come.

Top of the list was the formation (finally) of an Italian coalition government. Market reaction is likely to be positive, although Italian assets rallied last week, and today’s auction of up to 6 billion euros of five- and 10-year bonds should continue this year’s trend of being snapped up by investors. Italian bond futures have opened about a third of a point higher.

Prime Minister Enrico Letto will seek a vote of confidence in parliament at 1300 GMT, which presumably should go without a hitch. But a coalition with the centre-left and Silvio Berlusconi does not necessarily look like a recipe for smooth government. It is quite possible that the leftward part of the centre-left will find it too hard to stomach, eventually leading to a split. Letta is expected to try to pass at least a few basic reforms quickly including a change to Italy’s much criticised electoral laws and a cut in the size of parliament

As far as the markets are concerned, there shouldn’t be any nerve-jangling economic policy shocks although Letta has said debt-cutting is self-defeating. New economy minister Fabrizio Saccomanni said on Sunday he plans to cut taxes and public spending and lower borrowing costs. The rhetoric may have shifted but the reality for the euro zone’s high debtors is many more years of pain to come. But it’s probably true that more emphasis will now be placed on structural reforms.

German Finance Minister Wolfgang Schaeuble meets his Spanish counterpart, Luis de Guindos, in southern Spain and may have some goodies on offer. Last week, he hinted that he would support a joint programme to boost investment in small- and medium-sized companies – the fabled SMEs. Irish premier Enda Kenny will be there prior to flying to Lisbon. The European Central Bank is also looking at how to get credit flowing to smaller companies, although there is some internal wrangling about whether that is the work of a central bank. It’s interesting that Berlin is prepared to act bilaterally and the word is that similar mechanisms could be rolled out elsewhere.

Germany, despite standing firm against rhetoric suggesting the age of austerity is over, also appears content to see Spain and others in the euro zone get a year or two longer to meet their deficit targets. This begs two profound questions. Does this suggest Berlin is loosening up a little as its economic data suggests even it is struggling? And does acting bilaterally denote a loss of faith in the European Commission?

France is shifting too. President Francois Hollande will this week propose cutting capital gains tax levied on entrepreneurs, having planned last year to put the rate up on business owners.

The “ECB put” – via its pledge to buy the bonds of euro zone strugglers in unlimited amounts if needed to shore up the currency bloc — has been heavily fortified, in global markets terms, by Japan’s move to print money at a much faster rate. The man most responsible for this shift, Japanese Prime Minister Shinzo Abe is in Russia today seeing Vladimir Putin and will be in the Gulf and Turkey later in the week; an interesting looking trip.

Iceland duly turned its back on austerity over the weekend, rejecting the government that tackled the financial meltdown of 2008, in favour of the centre-right which presided over the mess in the first place. No sign of let-up in Greece though. Parliament approved a law on Sunday to free up nearly 9 billion euros of EU/IMF loans, which makes it easier to fire government employees for disciplinary reasons, extends an unpopular property tax and opens up professions such as accountants and bakers.

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