Credit Suisse on Italy: “better than expected”

Italy has a new Prime Minister, Enrico Letta, and a new grand coalition government, which according to Credit Suisse represents a better-than-expected ending.

The new PM his ministers were sworn in on Sunday and will now go through the confidence vote in the Lower House and in the Senate. Given the very large majority supporting the government – from Berlusconi’s PDL to Bersani’s PD and Monti’s SC, it is widely expected that the confidence vote will be a mere formality.

“We believe the new government is, from a market perspective, better than most other alternatives that had been considered – not just in the past few days but even before the elections of two months ago,” Credit Suisse said.

Despite the crisis and some anti-Euro sentiment during the electoral campaign, Italy ends up with a strong pro-European government.

Three key points in the program are growth, a “New Europe”, and political reform.
“There is, unsurprisingly, no detailed program yet. However, the new PM has already sketched the priorities. The first will likely involve support to SMEs, through the full payments of arrears owed to the private sector; tax cuts for companies, and a scaling down of the real estate tax introduced by the Monti government. Current expenditures should be cut, while some additional funding should be found through some flexibility in European constraints,” the banks added.

The second priority is a re-orientation of European policies, towards less ‘austerity’ and more growth. This is a view that Enrico Letta shares with the European Commission and several other countries in Europe – the periphery, clearly, but also France and possible the Netherlands now. Germany still appears as the country to convince. As we have written many times over the past years, we believe that it would make sense for Germany to boost domestic demand in this phase – for the country itself and for Europe as a whole.

Finally, a third key set of policies will include the reform of the political system, with a change of the electoral law, transformation of the Senate in a regional Parliament, and reduction of the number of MPs.

According to the bank’s research team, the government is well-balanced and appears strong, in our view, even if the weaknesses of the Italian political system could still bring it down.

Political stability is, however, supported by the stance and options available to the President of the Republic.
“Overall, we see limited risks of early elections taking place over the next twelve months or so,” Credit Suisse said.

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