Hard road to freedom
Rome is half out of the woods. Italy’s 10-year bond yields have fallen by over a percentage point since European Central Bank Chief Mario Draghi hinted at a new bond-buying programme. With yields falling and confidence returning, the need for a bailout is waning.
If a bailout can be avoided, it should; nobody wants to see the euro zone’s third-largest economy on life support. And at current yields, Italy’s debt looks almost sustainable: Rome would need nominal growth of 2.4 percent of GDP – which would be below its long-term average – and a primary surplus of 3 percent of GDP, which the International Monetary Fund expects this year.
However, Italy needs to convince investors it can grow its way out of debt, forecast by the IMF to hit 125 percent of GDP this year. And there is a long way to go to make the economy competitive again.
Mario Monti’s government is working on this. But he needs progress on talks with unions and employers to reform labour markets, and more clarity on privatisations. Even then, investors will still worry that the reform agenda may not survive next year’s election.
Unfortunately, the political landscape after Monti remains a puzzle. The two leading parties, the Democratic Party and centre-right People of Freedom Party, can’t agree on a new electoral law. Neither can count on a majority. Uncertainty reigns across the political spectrum. The Democratic Party is facing a potentially destabilising leadership contest between Pierluigi Bersani and Matteo Renzi, the charismatic mayor of Florence. The prospect of a comeback by Silvio Berlusconi still hangs over the right. The Five-Star movement fronted by comedian Beppe Grillo, now the third-largest party, is a wild card. One hope is that in the absence of a clear majority, a new grand coalition backed by both right and left parties could be formed. But that may not happen soon. In the meantime uncertainty and a heated campaign could push up yields.
Hopes are rising that Mario Monti could stay on after the elections as the figurehead of a broader coalition. With 10-year yields nearly back to Italy’s pre-crisis levels, Italians may well wonder whether it’s worth rocking the boat.