Italy’s budget deficit ready to invert its trend, DailyFX

As the third largest economy in Europe, Italian growth is crucial to the region and budget deficit is starting to show signs of turning around, suggesting that the crisis is beginning to wane, according to Christopher Vecchio, currency analyst at DailyFX.

“It was -5.4% of GDP in 2009 but has improved to -3.9% as of the most recent available reading for 2011,” he said.

Could this continue? “Absolutely, so long as the country doesn’t stray from its current dose of austerity, which is looking more and more unlikely,” he replies.

While a national unity party is being called for after the elections, given the fact that the views of the leaders of each sect are so different, any mandate set forth will be weak and new elections will be held over the coming months.

Germany and other pro-austerity core countries will continue to pressure whatever government is in place to continue reforms, but the Italian electorate has suggested that any additional belt-tightening is unacceptable.

“The Italian elections are far from a ‘tempest in a teapot’; this is a volatile situation that could slip away from European leadership very quickly,” Vecchio said.

He added: “But it is unlikely that borrowing costs will shoot up once more: the ECB’s OMTs, the safety net that has allowed the EURUSD to recover from its July 2012 low at 1.2041, could be initiated at any time to put a cap on sovereign yields. While this may be seen as the last option available, it would keep a lid on the financial aspect of the sovereign debt crisis.”

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