May 20, 2018
Finance

Commission warns against political uncertainty in Italy

The European Commission on Thursday warned Italy to get its act together and form a government or face the economic consequences.

Its been almost two months since the inconclusive election and despite the efforts of President Sergio Mattarella, the main parties are no closer to forming a coalition.

In its spring economic forecast, published Thursday, the Commission had some good news for Italians, including on unemployment and public debt. In terms of economic growth, it forecast GDP going up by 1.5 percent in 2018, the same level as in 2017.

However, “risks to the growth outlook have become more tilted to the downside,” the Commissions forecast said. It added that “policy uncertainty has become more pronounced and, if prolonged, could make markets more volatile and affect economic sentiment.”

The Commission has so far tried to stay away from public statements on the political situation in Italy, possibly as a result of Jean-Claude Junckers pre-election comment that “we have to brace ourselves for the worst scenario and the worst scenario could be no operational government,” which angered many in Italy and slightly moved the financial markets before he backtracked.

The election saw the anti-establishment 5Star Movement become the largest party, with the right-leaning alliance led by the far-right League winning the most votes. No one has enough support to govern alone.

In its report the Commission praised the labor reforms introduced by the outgoing center-left government of Matteo Renzi and forecast that unemployment will keep on falling. “Employment is projected to grow broadly in line with economic activity but also to benefit from the new permanent three-year reductions of social contributions for hiring newly-employed young workers,” it said. As a result, it forecast that “the unemployment rate is set to fall below 11 percent in 2018 and to decrease to 10.6 percent in 2019.”

In absolute terms, Italy has the worlds third largest debt pile, a source of serious concern in Brussels. But thanks to economic growth, the GDP/debt ratio is predicted to fall after having “peaked in 2017 at 131.8 percent, also due to public support to the banking sector, and to progressively decline to 130.7 percent in 2018 and 129.7 percent in 2019, mainly as a result of stronger nominal GDP growth.”

On the budget deficit front, Rome will be below the EUs self-imposed 3 percent limit, according to the forecast (“in 2018, the headline deficit is expected, assuming no further policy changes, to decline to 1.7 percent of GDP, supported by economic growth and some measures included in the 2018 budget.”)

Despite the good news on the economic front, theres no solution in sight to the government formation problem. Italian media say that Mattarella will hold another round of consultations on Monday before deciding whether to keep trying to get agreement or push the parties to form a short-term government, probably ahead of fresh elections.

Original Article