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Political crisis in Italy: what economic consequences?


Political crisis in Italy: what economic consequences?

Milan (AFP)

Italy, the third largest economy in the eurozone, is again in turmoil after the break-up of the government coalition. What may be the economic impact of this crisis?

How will markets and the economy react?

As soon as the markets opened on Friday morning, the spread, the closely watched discrepancy between the Italian debt rate and the German ten-year reference rate, jumped 25 points to stand at 235 points, reflecting concern of the financial circles.

Around 10:30 (0830 GMT), the Milan Stock Exchange yielded around 2% with the entire banking segment down sharply.

"The uncertainty has a price, which is called spread and possible lowering of the rating of Italy by rating agencies," said Carlo Alberto Carnavale Maffe, a professor at Bocconi University in Milan.

Chance of the calendar, the rating agency Fitch must review this Friday night its rating on Italy, which is currently BBB (two notches above the speculative category, "junk"), with a negative outlook.

Analysts are divided on the decision of the agency, which will not have time to take into account the impact of the crisis emerged Thursday. In October 2018, Moody's lowered the rating of the peninsula to "Baa3", just above the speculative category, by worrying about the budget choices of the populist coalition in place in recent months.

According to Carnavale Maffe, "August is a month with low trade volumes: only small variations to have a very large impact on the spread and the share price," and the country, already fragile, "will pay the consequences of this crisis ", triggered during such a sensitive period.

What is the situation of the Italian economy?

The third economy in the euro zone is not doing well. After a "technical recession" in the second half of 2018, Italy experienced zero growth in Gross Domestic Product (GDP) in the first six months of the current year.

For 2019, the European Commission and the International Monetary Fund (IMF) expect Italian growth of only 0.1%, and the government of 0.2%. But some experts are even more pessimistic, believing that the peninsula could once again fall into recession.

The Italian economy is affected by the slowdown that affects all Europe, the trade tensions between Beijing and Washington, but also by the caution of companies that invest less, worried about both global developments and political instability .

As a result, the unemployment rate stands at 9.7%, and even reaches 28.1% among 15-24 year-olds, well above the euro area average (7.5% and 15.4%). %).

An additional problem, the country has a colossal debt of 2,300 billion euros, 132% of its GDP, the highest ratio of the euro area behind Greece.

Brussels is therefore constantly pressing Rome to reduce its public deficit. On several occasions there has been considerable tension between the European Commission and the Italian government, which has finally agreed to reduce it to 2.04% in 2019 instead of 2.4%.

What could happen if Matteo Salvini won early elections?

The boss of the League (far right) has always lambasted the dictates of Brussels and judged the Minister of Economy, Giovanni Tria, much too conciliatory with Brussels.

He recently said that the next budget could not be "below the 2% deficit". "The dogmas of Brussels are not sacred," he said, while excluding a deficit of 4 or 5% of GDP.

"There will certainly be a clash with Europe and it is a government and a Parliament legitimized by the Italians who will have to do it," he said, calling on the country to give it a clear majority.

Salvini, whose electorate is made up of small entrepreneurs and craftsmen in the north, needs a "brave" budget, with major tax cuts and major public works, to boost growth.

He also promises to prevent the rise in VAT, already voted by the outgoing parliament, despite the 23 billion euros of additional revenue it would represent.

© 2019 AFP

Source: france24

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