Italy: New government pledges to ease austerity
May 2, 2013
On 28 April, Enrico Letta of the Democratic Party (PD) was sworn in as new Prime Minister, ending a two-month political stalemate in the wake of the 24/25 February general elections. Letta's government will be supported by a "grand coalition" formed by former Prime Minister Silvio Berlusconi's PDL party and Letta's Democratic Party (PD).
Markets cheered the end of the political impasse, prompting a decline in interest rates on Italian sovereign debt. The yield on Italy's 10-year bond dropped below the 4.00%-threshold to 3.97% on 29 April, the lowest rate in two and a half years. The spread against German Bunds eased to 276 points. FocusEconomics panellists expect the 10-year bond yield to rise to 4.60% by the end of the year before moderating to 4.35% in 2014.
Letta has pledged to relax the austerity drive and to push for measures to foster growth and employment, in cooperation with the country's European partners. In his first speech to the parliament, Letta proposed to suspend the controversial housing levy due in June and to freeze the VAT increase planned for July.
While not providing details on how to compensate for the lost revenue, Letta assured that the government will stick to its commitment to keep the budget deficit below 3.0% of GDP this year. FocusEconomics panellists consider the government's pledge credible and see a 2.3% of GDP shortfall for this year.
Author: Armando Ciccarelli, Head of Data Solutions