On 21 July this year, the coalition of national unity dissolved: with the new elections at the door, investors have more than one reason to view Italy with nervousness. It can be read in the report by Christophe Grosset, European Sales Director di Spectrum Markets, according to which the lack of a clear idea about the direction that Italy could take is also reflected by the Serix data. In fact, in the last month, the fluctuations in investor sentiment have been large, however reaching an average for the month of September of 99, or a value close to neutrality.
The strange fall of the government
The latest government certainly cannot be accused of not having made progress. According to Istat estimates, in the second quarter of 2022 the economy grew by 4.6% on an annual basis. This is, according to the report, the sixth consecutive quarter of growth, and the strongest growth among the G7 countries. Over the same period, the unemployment rate fell to a ten-year low of 8.6%. Italy also took prompt action to counter the rise in energy prices, reduce costs for businesses and increase purchasing power.
In this context, according to Grosset it would seem very strange that such a government intends to resign. On the other hand, explains the top manager, in Italy there are very rooted electoral and party interestswhich have affected the mission of this unfortunate executive of national unity.
The economic risks of political instability
The direction the new coalition, whatever it may be, will take is uncertain. According to Grosset, the Italy’s strong dependence on natural gas importsmakes the problem of the surge in energy prices more serious for the Bel Paese.
Another critical factor, according to the top manager, is it wage development: according to OECD data, wages in Germany and France increased by a third in real terms between 1990 and 2020, while here they remained stable. As a result, inflation and energy shortages will hit hardest what is currently the third largest economic power in Europe.
Maxi package of reforms that cannot stop
We must not forget, the report reads, that Italy is about to adopt a structural tax reform package: among the measures requested by the EU to give its consent to the disbursement of the funds of the recovery plan there are a new law on competition, a tax reform and a revision of parts of the legal system aimed at speeding up judicial processes, which are the slowest in Europe. The strong second quarter figures of this year are a good sign, Grosset writes, but they shouldn’t overshadow the importance of National Recovery and Resilience Plan (Pnrr) for the future. Between 1999 and 2019, the Italian GDP grew by only 7.9%, compared to the French growth of more than 32%, and the Spanish one of almost 44%.
On the one hand, Grosset points out, there is a accumulation of requests for reforms that should be approved and the premier in office is following a very ambitious program to implement as many pending decrees before the end of his term. On the other hand, there are issues that do not come from Italy, but are more important challenges for our country than for others. Climate changeaccording to the top manager, is another area in which Italy is particularly vulnerable: if heat waves or severe storms are increasingly problematic in many European areas, Italy is disproportionately affected due to the number of people living in areas exposed to environmental problems.
All these themes have been explicitly contemplated in the 273 pages of the NRP. Given the importance of implementing this plan, according to Grosset, the breakup of the coalition was particularly inopportune.
The capital market in Italy
In terms of market capitalization compared to GDP, Italy, with a share of 31% according to OECD data, obtained results lower than the other major European economies. However, the report reads, almost all developed economies could claim that the “capital market culture” in their country is underdeveloped. On the other hand, according to Grosset, the solid network of entrepreneurs of Italian SMEs is still the engine of the country’s economy.
There is a strong correlation between a country’s national pension scheme, and the size and maturity of its capital market. As the report explains, nations with well-funded pension systems are also those with the largest market capitalization, such as the United States and the United Kingdom. Conversely, countries with pay-as-you-go pension systems tend to have less capital market activity.
Grosset points out that, although pension schemes remain essentially unchanged (or perhaps precisely for this reason), there is another movement in the activity of the Italian capital market. According to a Consob report, the share of financial investments by Italian households in the last ten years (although it has not grown overall) shows significant changes in the allocation of assets. You register a steady decline in obligationsoffset by an increase in mutual funds, foreign equities and derivatives, which can be seen as a strong signal.
In Italy many more measures have been implemented than in other European countries. In 2017, i individual savings plans (Pir), to incentivize investments in SMEs. Under this plan, the report reads, investments in Pir products are exempt from capital gains tax and inheritance tax for at least five years. According to Grosset, this is an initiative that can certainly be developed and that could also be adopted by other European countries.
Which path will our country take?
“I trust that Italy will stick to the reform path it has chosen and that it does not intend to back down following the elections,” Grosset said. In general, continues the manager of Spectrum, “it is safe to assume that no political party will be able to successfully carry out its election promises, if it were to stray too far, or too long, from a path of reform. Although the current national situation is considered very important in Europe, the new elections also offer the possibility for a new government to accelerate and support reforms ”.