Q&A: Why investors are wary of Italy's elections

Published on NewsOK Modified: February 24, 2013 at 11:19 am •  Published: February 24, 2013
Advertisement
;

FRANKFURT, Germany (AP) — Investors are keeping a wary eye on Italy as the country heads to the polls Sunday and Monday to elect a new parliament. They fear that a new government and prime minister could weaken or scrap the economic reforms and budget cuts begun by outgoing Prime Minister Mario Monti during his 15 months in office and hurt Italy's chances of recovering from a decade of low growth.

While the markets are unlikely to punish Italy as they did in 2011-12, they will want to make sure a new government doesn't mean a return to Italy's bad old days.

Here are some questions and answers about this weekend's elections matter for Italy and the rest of Europe.

Q: Why all the worry?

A: Italy's economy — the third-largest among the 17 European Union countries that use the euro — has only grown less than a half percent a year on average for a decade. That is compared to 1.25 percent in other rich industrialized countries. Faster growth is needed to shrink Italy's mounting debt burden, which already equals 127 percent of its annual gross domestic product.

Because of its size, Italy's problems can dent market confidence in the whole eurozone. Doubts about Italy's ability to manage its debt caused markets to question whether the euro could survive in 2011-12.

Q: What's wrong with its economy?

Before it signed up to join the euro, which was formally launched in 1999, Italy used to give its economy a boost by to devaluing its old currency, the lire — a trick that used to make its exports cheaper.

Devaluation helped mask underlying problems such as labor rules that favor vested interests such as unions and established workers, which kill off job prospects for younger people; a high business tax burden and heavy cost to businesses from expensive public utilities and red tape.

Italy "remains in dire need of structural reforms to boost competitiveness and improve trend growth," wrote economists Norbert Aul and James Ashley at RBC Capital Markets. They noted that the only economies that have grown more slowly in the past 12 years are Zimbabwe, San Marino, and Portugal.

A growing economy would increase government revenue from business and income taxes and the country's debt.

Q: Where does Monti come into all this?

A: Italy's political parties installed Monti, a former EU commissioner and academic, as prime minister to lead a temporary crisis government of financial experts in November, 2011. His predecessor, Silvio Berlusconi, resigned after high borrowing costs, fed by fears Italy would not pay its debts, threatened the country with financial ruin and rattled confidence in the eurozone.

Monti set about easing some of Italy's anti-business practices, such as labor laws that made it extremely difficult to fire longtime workers. He reduced the budget deficit with the help of an unpopular tax on homes.

Italy's deficit is down to around 3 percent of gross domestic output for last year — not great, but it complies with the official limit for eurozone members.

However, in January, Monti resigned as Prime Minister after Berlusconi's party withdrew its support and criticized his cutbacks - hence the new elections.

Q: So now the elections are under way, what are investors afraid of?



Trending Now


AROUND THE WEB

  1. 1
    Report: Caron Butler close to two-year deal with Detroit Pistons
  2. 2
    It’s harder to be a poor student in the U.S. than in Russia
  3. 3
    Man fatally stabbed in west Tulsa early Sunday
  4. 4
    How brain imaging can be used to predict the stock market
  5. 5
    Bridenstine tours Fort Sill, satisfied with facility's transparency
+ show more