(Bloomberg) -- Strip away Italy’s troubled election result and there’s a struggling economy seeking direction and desperately in need of reform.
Last year showed the best expansion since 2010, but the pace still lagged behind that of Germany, France and Spain. In addition, unemployment is above the euro-area average and Italy is forecast to remain the slowest of any nation in the currency bloc this year.
“Italians need lower taxes to be able to grow more, they need more efficient firms, they need more efficient government,” said Luigi Zingales, professor of finance at the University of Chicago Booth School of Business. “In the long run, you need a strong and competent political leadership that enables Italy to relate to France and Germany as well as to all the EU’s main institutions.”
The Sunday vote left two main frontrunners, the nationally untested Five Star Movement and the radical-right League. Matteo Salvini, the League leader, toasted his party’s ultra-strong performance by again predicting the death of the euro, something investors and markets don’t want to hear.
“It’s a very fragile situation,” Societe Generale Chairman Lorenzo Bini Smaghi said in a Bloomberg Television interview with Francine Lacqua on Tuesday. “All this depends on growth, which is continuing in Europe and, of course, in Italy although at a slower pace.”
Bini Smaghi said that given a possible slowdown in the world economy and the
winding down of the European Central Bank’s quantitative easing, “you need
action to be taken and without a government it’s going to be difficult for
Italy to get out of this fragile situation.”
The former ECB executive-board member added that one option might be new elections because a prolonged stalemate could unnerve investors.
For now, markets are taking the muddled Italian political picture in their stride. Milan’s FTSE MIB stock index was up 1.08 percent at 22,055.19 as off 10:30 a.m. Italian time Tuesday. The government 10-year bond yield was down 3 basis points to 1.97 percent, while the spread with equivalent German bunds narrowed almost 4 basis points.
Italy is tied up in bureaucratic red tape, while its citizens chafe under one of the euro area’s highest personal income tax loads. Its debt to gross domestic product ratio consistently tops 130 percent, a ticking economic time bomb that few of the country’s citizens can hear. The European Union predicts the growth pace this year and next will be slowest in the 19-nation euro area.
Italy’s recovery from its deepest post-war recession slowed down at the end of last year as exports only partially offset weaker domestic demand. While a tepid pickup in employment is taking place, most new jobs are on fixed term, adding to the feeling that employment here is rarely quite secure.
The anti-establishment Five Star got its best results in the constituencies with the highest levels of unemployment, according to the CISE electoral-study research group at Rome’s Luiss University.
Both Five Star and the League played on Italians’ frustration with unemployment, which consistently hovers around 11 percent.
“Job recovery rests on the revival of the construction sector and brisk activity in industrial sector,” said Raffaella Tenconi, founder of London-based consultancy ADA Economics.
While Italy prides itself on the strength of its global exports, Tenconi cautions that “things could become complex if the disputes between the U.S., European Union and China” hit global commerce. President Donald Trump’s boast that “trade wars are good” has hit a raw nerve in Italy and elsewhere in the 28-nation European Union.
The ruling Democratic Party, which failed to gain over 20 percent on Sunday, is keenly aware the euro area’s third-largest economy needs to catch up with the leaders.
“We risk that the European train takes off with the grand coalition in Berlin, with the obvious political leadership of Emmanuel Macron” in France, Sandro Gozi, Italy’s current junior minister for European affairs, said in a Bloomberg Television interview. And he says Italy could be left behind at the railway station waving goodbye.
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