League chief eclipses senior coalition partner with anti-immigration broadside
Matteo Salvini heads the junior coalition partner in the populist government that took office in Italy on June 1. Yet the leader of the far-right League has seized control of the political agenda — eclipsing the anti-establishment Five Star Movement led by Luigi Di Maio, which won nearly twice as many votes in the March elections but is struggling to project its voice in power.
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The adjustment on the upside is not over on Italian rates. The 10 year bond’s rate is converging to 3%. The spread with the German 10-year rate is now circa 270 bp. This also reflects a safe heaven effect for German bonds.
With a rate at 3% % while the inflation is at 0.5% (in April), the real rate is way too high in Italy compared to real growth prospects. But such a level on the real rate (2.5%) would be just above the average seen since the beginning of the Euro Area (2.2%). It’s too high when the GDP trend is close to 1%. This has deterred investment and it will continue limiting the capacity to grow. We have to expect a slowdown in the economic activity in coming months. It will come from the real rate level but also from the uncertainty in the Italian economy. An austerity program that can be expected from a transition government is not good news for Italy but also for the rest of the Eurozone.
This map reflects questions about the sustainability of a government when constituents of it belong to regions and communities that are in a historical conflict. A real source of uncertainty
Judging by the Italian president Sergio Mattarella’s (justified) refusal to approve a government that would have been dominated by the League with its aversion to Europe and its institutions, the forthcoming parliamentary elections in Italy will focus on the euro and Italy’s membership of the euro area.
The worrying point here is that the Italian population is no longer in favor of the euro, as shown by the latest European Commission Eurobarometer survey (October 2017), when 40% of Italians said that the euro is a bad thing for the country as compared to 25% of the population in the euro area as a whole, and also in France. Meanwhile, only 45% of Italians think that the euro is a good thing for the country vs. 64% on average in the euro area and France. The European question played a major role in the French electoral campaign in spring 2017, but we can see that the European aspect of the Italian elections was driven by different considerations. Close to half of Italians are skeptical on the usefulness of the single European currency, and herein lies the real difference. Continue reading
The Italian situation becomes more complex after the resignation of Prime Minister Guiseppe Conte. The Italian president didn’t validate the government Conte has presented to him.
In this possible government, Salvini, the leader of the League, had the Ministry of the Interior and Di Maio, the 5-star movement’s leader, the Ministry of Labor. These points were recorded.
The stumbling block was the Ministry of Finance, where Paolo Savola, who is very critical of the euro and the construction of Europe, was being approached. Continue reading
The lull in Italy after Conte’s appointment was short-lived. The 10-year rate is up sharply while the German rate retreats. The spread is increasing. The Salvona hypothesis for finance minister does not satisfy because of the systemic risk associated to him
Giuseppe Conte’s appointment is the first reduction of uncertainty in Italy. The 10-year rate falls back this morning and the spread with Germany is narrowing. But this is only a first step. Now there is the formation of the government and it will be another matter.