By: Dr. Mike Campbell
The new Italian Prime Minister, Mario Monti, faces a crucial vote of confidence in the Italian parliament today. Mr Monti is an unelected leader and a former EU Commissioner; his cabinet is also composed of unelected technocrats whose sole purpose is to restore confidence in Italy and steer it through its sovereign debt crisis. Loss of confidence amongst investors has seen the yield on Italian ten year bonds sail through the unsustainable 7% barrier, although it has now fallen back to 6.4%.
Italy’s debt comes in at 118% of GDP and has been exacerbated by years of weak growth. The debt burden in the Eurozone’s third largest economy is approximately €1.1 trillion; something like four times the size of the Greek sovereign debt.
Mr Monti has to get credible austerity measures through parliament which are designed to cut into the nation’s debt mountain. The current raft of measures involves cuts worth €34 billion The austerity budget package includes tax increases, pension reforms and spending cuts; pretty much the same medicine being doled out, at various dose rates, to the electorate Europe-wide right now. The government’s aim is to achieve a balanced budget by 2013. Given that the economic situation in Europe and around the world is weakening, this may be a tall order since weaker global demand will equate to lower fiscal revenues from tax receipts. It is likely that his government will survive the confidence vote – if for no other reason than the alternative is unthinkable.
The Italian PM has said that his government will move towards growth boosting measurements once the budget has gone through. It remains to be seen how much resistance the austerity measures will trigger in the Italian public – at least this government does not have to worry about losing popular support since it has none in the first place.