ECB And IMF Rescue Of Italy Likely Needed To Forestall Wider Financial Crisis

by: Research Recap

Financial markets’ belief that a technocratic Italian government has only a limited lifespan could undermine its credibility much more quickly than the six to twelve months it might have before a general election, according to Oxford Analytica.

After the immediate politics of the coalition crisis are spent, such a government must:

  • shift the balance in taxation policy and social insurance from labour to consumption and property;
  • address serious shortcomings in the current government’s proposals on pension reform through further tightening of the criteria on the retirement age; and
  • answer the questions posed by the Commission inspectors on the substance of ideas to reform the labour market and competition policy.

These are the toughest measures on the Italian public policy agenda.

With a general election unlikely to deliver public support for the long haul the Italian economy now faces, markets may legitimately ask if an emergency government with an uncertain majority can really address them in a matter of months, in the face of an electorate deeply wedded to current welfare outcomes and as yet unprepared to face any radical change, beyond changing the faces of its government.

The earliest that the emergency austerity measures can be voted on is next week; however, it could take until mid-December, especially if the Northern League, the junior coalition partner in Berlusconi’s government, tries to insert amendments to the legislation. This process will occur in parallel with negotiations over the government that either succeeds Berlusconi in the coming months or acts as caretaker for an immediate general election. All this political activity could be rendered moot if the worst-case scenario occurs, in which Italy is forced to request a bailout. Since the EFSF lacks the firepower to come to the rescue, the ECB and the IMF appear to be the only other options to forestall a wider financial crisis.