The Daily Update - A Task Ahead for New Italian Coalition

Having sworn in the Democratic Party (PD) and Five Star Movement (M5S) coalition government last week, Italy will this week face a number of votes of confidence; following last night’s positive vote in the lower house of parliament, with today’s in the Senate. Once all the formalities are out of the way, the new PD-M5S Italian government will begin to work on its 2020 budget proposal which is due to be presented to the EC and the country's parliament by the middle of October; however, some delays are expected. 

What will be interesting is just how the government will look to reduce its structural deficit levels next year (currently over 2% of GDP) in order to avoid sanctions. The country managed to closely escape an excessive deficit procedure in December 2018, however, as part of the Stability and Growth Pact rules, Italy must slice its structural deficit until a balance or surplus is reached. Interestingly, PM Giuseppe Conte called for a reform of the EU rules which limit country deficits to 3% of GDP telling parliament: “We also need to improve the Stability and Growth Pact and its application, to simplify the rules, avoid pro-cyclical effects, and support investments,”. Europe has told Italy to reduce its deficit, thus its debt, for a while now; the country’s debt is currently more than EUR 2.3bn that’s over 130% of GDP, the second worst level in the eurozone after Greece.

The market appears to be in favour of the new coalition government, with the spread on the benchmark 10-year Italian Government Bond trading around 150bps over Bunds, having been as high as 285bps over, at the end of May. Some may also say that the new EU-friendly coalition will reduce Italexit fears. We in Britain however wait as the Brexit deadline draws nearer and we are still nowhere near reaching a deal, as Parliament is officially suspended for five weeks.

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