Amundi: Commentary on the formation of a new Italian government

4 sep 2019

By Matteo Germano, Head of Multi-Asset at Amundi

The formation of the new government ends the summer political crisis in Italy and gives short term relief to investors, just when the country is facing two important deadlines –  the preparation of the budget law to avoid the VAT increase and stimulate the stagnant economy, and the recommendation of the Italian representative to the new EU commission. Markets welcomed the resolution of the crisis that ended political uncertainty and instability.

Already, the BTP spread vs German Bund is falling below 150 and there is still room for the spreads to fall in the short term. This is good news for the country’s finances as the cost of debt is reduced. However, some volatility will be back in the journey to draft the budget law as the new government prioritises its tasks and redistributes financial resources all the while respecting European fiscal rules.

Beyond the short term, the challenge of the new government will be to reinvigorate the economy through investment, innovation and measures to deal with the demographic challenge. This will require time and a strong political commitment that is too early to see in this new government. The good news is that at the EU level, we are moving away from fiscal austerity and there is room for some fiscal expansion. It’s probably the right time to take action which could have a long term impact.