Europe: Italian politics dominated the week – Westpac

Elliot Clarke, Research Analyst at Westpac, points out that this week saw Italian 2 and 10yr yields surge (very briefly) to crisis levels on anxiety over whether the anti-establishment parties could form a coalition government.

Key Quotes

“The ‘crisis’ had a lifespan of a day as a rearranging of ministerial duties within the coalition did enough to gain the President’s approval. Whether this coalition proves capable of working together and being productive are entirely different matters for which only time will tell. As we end the week, tensions are now growing in Spain after reports Prime Minister Rajoy will lose a ‘no confidence’ motion against him, due Friday. This would see a caretaker government take over, led by the leader of an opposition party that only holds a quarter of the seats in parliament.”

“Needless to say, progress under such an administration is going to be extremely difficult if not non-existent. This week’s outcome in Italy and the likely result in Spain speak to the real concern for Europe: the continued absence of governments capable of reform. As the support to growth from surging consumer credit recedes, the absence of productivity and income growth will be felt all the more. This will see the ECB struggle to make any headway in bringing the stance of policy back to a more normal footing.”