A day after the resignation of "Britain's shortest-serving prime minister in British history" Truss, the world's eighth-largest economy also ushered in changes.
On October 21, local time, Giorgia Meloni, leader of the Italian Brotherhood Party, was appointed as the country's first female prime minister and was officially sworn in on the morning of the 22nd. The victory of Meloni and her center-right coalition means that Italy will enter the most right-wing government since the fall of Mussolini in World War II, triggering a "political earthquake" in Europe.
Meanwhile, Italy is gripped by fears of an "economic earthquake."
Similar to the UK, Italy is now plagued by recession and inflation, and Meloni's government needs to balance its priorities for economic growth with fiscal prudence. According to previous election promises, the Italian brother party will reduce the burden on enterprises through the policy of "tax cuts and increased expenditure", which has aroused doubts in many European countries.
Will Italy's first female prime minister become the country's "Iron Lady" or Italy's "Truss"? Also facing high inflation, will Meloni's government, like Truss, fight the recession with tax cuts? Under many variables, the uncertainty of the future direction of the Italian economy has attracted attention.
Giorgia Meloni, leader of the Italian fraternal party, source Xinhua News Agency
Italy's new government takes over the economic "mess"
Italy is the fourth largest economy in Europe and the eighth largest in the world. Under the influence of a series of uncertainties this year, the Italian economy is bearing a heavy burden. In addition to the energy crisis, the most interesting economic aspects are inflation, recession risks and debt stress.
Preliminary inflation statistics for September, released by Italy's National Institute of Statistics, showed that the consumer price index (including tobacco) rose by 0.3% month-on-month and 8.9% year-on-year in the month, "almost all product sectors are facing increasing inflation". Core inflation, which excludes energy and fresh food prices, is also climbing, rising to 5% from 4.4% in August.
The increase in inflation in Italy in September was mainly driven by higher prices for food, cultural entertainment and personal care services. Among them, the prices of food, household and personal goods rose by 11.1% year-on-year, reaching a new high since July 1983. High inflation has directly affected the basic life of the Italian people.
Italy's inflation rate reached 8.9% in September this year and hit a new high Screenshot of the TradingEconomics website
Issues such as energy prices and inflation can also depress the survival space of Italian companies and increase the risk of recession.
Inflation triggered by rising energy prices could lead to the closure of at least 120,000 small businesses in Italy between now and the first half of 2023, according to the Italian retail trade association; The International Monetary Fund (IMF) said Italy's inflationary pressures were so high that it could tip the country into a technical recession next year.
The latest report from the General Confederation of Italian Industrialists has lowered the country's economic growth forecast for next year to zero from 1.6% in April.
Italy is also a heavily indebted country.
Italy is saddled with a huge debt of more than 2.7 trillion euros, or about 150% of its GDP. Within the eurozone, this proportion is second only to Greece. According to statistics, Italy's central government debt reached 2.67 trillion euros, ranking third in the world after the United States and Japan.
Italy is facing debt pressure, the source of the picture is CSC
"No experience", the economic work of the new Italian government is questioned by Europe
Italy accounts for more than 98% of the total number of SMEs and is known as the "Kingdom of SMEs". In the face of pressure such as rising energy prices and inflation, appropriations and tax cuts have become important strategies for insurance enterprises. While "alleviating" economic anxiety, this increases fiscal anxiety.
The Italian government had already planned to allocate 66 billion euros to help households and businesses cope with the energy crisis through stronger tax incentives than expected. In addition, the Italian General Confederation of Industrialists has asked for an additional 40 billion to 50 billion euros to protect more companies from closure.
Large tax cuts and spending will inevitably mean that the government will use borrowing to support spending, and debt pressure will continue to rise.
Italy's 10-year bond yield rises above 4% The source of the picture is financial
Economic growth or fiscal prudence as a priority? This is the question that the new Italian government must answer.
Meloni reportedly promised during the election campaign that he would immediately address energy and other cost-of-living pressures on people and businesses. Her coalition has also proposed a series of fiscal policies to cut taxes and increase welfare, including lower corporate and income taxes. In this regard, the market has expressed its concern.
After the results of the September 26 election, the yield on the Italian 10-year bond rose nearly 18 basis points to 4.694%; At the same time, the spread between the 10-year government bonds of Italy and Germany, an important indicator of debt risk, hit a new high since April 2020 on the same day.
When economic pressures rise, Europe's debt problems tend to rise from Western Securities
Meloni did not go to college and previously worked as a nanny, street vendor, bartender and other professions. Although she is a young politician, she has been dealing with "youth affairs" throughout her political career. Solving the pressing economic problems may be one of the keys to Meloni's avoidance of becoming "Truss No. 2".
Sapio, a European economist at Barclays, said the new government would have to "strike a balance between prioritizing growth and prioritizing fiscal prudence." For the newly appointed government, there are inevitably doubts from all walks of life in Europe and the United States.
Lucrezia Reichlin, professor of economics at the London Business School, said: "The timing of the new government is not good. What is about to come is dark clouds, and there is nothing to be optimistic about"; According to Leila Simona Talani, a professor of international political economy at King's College London, "they [Meloni's new government] have no economic experience. ”
Piccoli, co-chairman of Teneo, a political risk consulting firm based in New York, said, "Although Meloni is a good communicator, she faces serious financial difficulties and does not have much experience, so she may not enjoy a long political honeymoon period." ”
Truss overturned first, but there are still variables in Italy
Behind the tax cuts, Italy and the United Kingdom have the same question: how to protect the economy under high inflation?
The Truss government "rolled over" first.
In the view of the Truss government, the key to escaping economic recession and social problems is economic growth. The problem with the UK economy is that it is growing too slowly to provide enough support for public service payments, for example. Then the most important countermeasure is to reduce taxes, enhance corporate vitality by reducing the burden on enterprises, and improve the long-term development of the economy.
The painful thing is that "the stakes are in the present".
Tax cuts mean more money in the market, which could offset the UK's efforts to curb inflation; What's more tricky is, where will the government's money come from after the tax cuts? Without the option of taxation, the gap in public spending can only be filled by borrowing, which will push up the UK's debt risk in the tide of interest rate hikes.
As a result, Truss's government was a sharp drop in market confidence, with both the pound and bonds dented.
In the eyes of some, the UK has the second lowest debt ratio in the G7, and its "end" is still so. Italy, which has a larger debt ratio, is likely to face pressure on massive spending, tax cuts, and borrowing to stimulate economic growth.
In the first quarter of this year, the ratio of UK debt to GDP was 99.6% Source: Office for National Statistics
It is worth mentioning that the similarity of the economic status of the United Kingdom and Italy is still somewhat controversial. A few days ago, a British media used a controversial series of operations to cause an uproar, and even led to "online tearing each other" between the United Kingdom and Italy.
British media published articles saying that post-Brexit Britain is more and more similar to Italy, where the political situation is chaotic and economic growth is weak, and Truss is also painted as the "centurion" (the captain of the hundred-man team in the ancient Roman army). In the eyes of Italian netizens, this is "malicious touching porcelain", and everyone angrily denounces the British media for being full of stereotypical prejudice against Italy, arrogant and rude.
In the face of economic difficulties, Italy's new government has used technocrats, such as former economic development minister Giorgetti as economy minister, thereby sending a positive signal to the outside world to develop the economy. Including whether the new Italian government will "curry" with the people despite the financial situation and the economic situation, and follow the campaign promises to "please" the people, there are actually certain variables.
The road ahead is fraught with difficulties, but it remains to be seen over a longer period of time where Italy's economic reforms will lead.
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