Italy and Spain Prepare for New Governments

In Italy and Spain stocks jumped on Friday.  They led broader European equities higher.

Both Italy and Spain ushered in new governments after a week when Italian political uncertainty rocked global markets.

There had been uncertainty over Italy’s government. However, late Thursday, populist parties, the 5 Star Movement and the League, made a deal to form a coalition government. They will be led by political novice Giuseppe Conte as prime minister. Conte was sworn in as prime minister on Friday. This ended almost three months of political deadlock.

Their earlier bid to jointly take power effectively crumbled at the start of the week.  Italian President Sergio Mattarella had rejected their euroskeptic candidate for economy minister, Paolo Savona. Savona gave up his bid for the post and accepted a role as minister for European affairs.

Meanwhile, Spanish lawmakers ousted Mariano Rajoy as prime minister through a no confidence vote. The vote was 180-169 against Mr. Rajoy. Pedro Sánchez, leader of the Socialist Party, will replace Rajoy.

The no confidence vote had been prompted by corruption convictions for senior members of Rajoy’s party.

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Italy’s New Coalition

Italy’s new coalition appears shaky.

The incoming coalition is made up of the anti-establishment Five Star Movement and the right-wing League party.  They say that they have plans to reverse years of austerity measures, reassess Italy’s foreign-policy priorities and renegotiate its links with the European Union.

Many of the items on its agenda are expensive.  For example, initiatives such as reducing the income tax, increasing subsidies for poor families and abolishing a recent reform that raised the retirement age would drive up public spending while diminishing state revenue.

Furthermore, those measures could deepen Italy’s deficit.  Italy’s public debt already exceeds 130% of gross domestic product.  Even more important, the Five Star Movement and League want to revise the EU economic governance framework. They want to abolish rules that establish debt and deficit limits for member states.

Of course, proposing policies and putting them into action are different matters.  To implement its agenda, the Italian government will have to overcome formidable challenges, including differences between the ruling coalition’s constituent parties.  But even if it doesn’t bring about the end of the eurozone, Italy’s new administration will force EU governments and institutions to make difficult choices.

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However events unfold, it appears that the situation in Italy is not trending in favor of the Eurozone.

For example, mass deportation of migrants may begin soon.

Matteo Salvini is Italy’s new interior minister.  He plans to implement his campaign pledge to expel half a million unauthorized migrants from Italy.
He has called for repatriations to be dramatically stepped up.  Salvini has declared one of the new government’s top priorities will be to “send them home.”  This would result in hundreds of thousands of undocumented immigrants leaving Italy.

“The free ride is over.” “It’s time to pack your bags.”

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“Italy is destroying itself — and dragging down Europe with it,” read the headline of Germany’s Der Spiegel magazine, the cover of which featured a forkful of spaghetti with one dangling strand tied up as a noose.

The Economy

Giovanni Tria is Italy’s new finance minister. He has been critical of the EU’s economic governance.  However, unlike others he has not advocated a plan to prepare for Italy’s possible exit from the currency bloc.

Instead he has called for a change in the EU’s fiscal rules to allow public investments to help growth and.  In addition, like many mainstream economists, he has criticized Germany’s persistently large current account surplus.

Two polls released Wednesday showed the vast majority of Italians did not want to drop the Euro.

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#Euroskeptics Cheer

Europe’s populists and right-wingers cheered the formation of a 5-Star-League government as a slap in the face to the 28-nation European Union. French leader #Marine Le Pen tweeted: “Bravo to the coalition.”

“It’s a victory of democracy over intimidation and threats from the European Union,” said Le Pen.  Moreover, she shares the League’s anti-immigrant stance.

#Nigel Farage is former leader of Britain’s UKIP party that played a key role in the Brexit campaign for Britain to leave the EU.  He wished good luck to the two leaders. “Gotta stay strong, or the bully boys will be after you,” he warned.

Specifically, it was a reference to EU officials, who have made clear in recent days their concerns — in occasionally undiplomatic terms — about the euroskeptic direction of Europe’s third-largest economy.

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Meanwhile in Spain, opposition socialist leader Pedro Sanchez won a vote to replace Mariano Rajoy as Prime Minister.

Sanchez won the no-confidence vote with 180 votes. This was a slim majority in the 350-seat lower house. There were 169 no votes and one lawmaker abstained.

Rajoy, one of Europe’s longest-serving heads of government, lost the vote following corruption convictions last week involving former members of his conservative Popular Party.

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