Next Crisis? Why Markets Are Worried About Italy Now
The markets are making it clear they think Italy will be better off financially if the country’s Prime Minister, Silvio Berlusconi, steps down. There’s a reason for that: his repeated failure to deliver on promises to reform the Italian economy.
Two reports broke this morning at 6:00am EST (noon in Italy) that Berlusconi’s demise was imminent. The markets took the reports seriously because they came from two journalists known close to the prime minister. The Italian market, which was down more than 2%, moved into positive territory by more than 2.5% percent—an intra-session move over more than 4%.
Italian yields, which were at Euro-era highs, fell back across the curve. Clearly, the market thinks Italy is better off without their billionaire leader.
Back in August, Berlusconi made a big show by forcing Parliament to work during what is normally the summer holiday to supposedly pass key reforms. That in response to pressure from Jean Claude Trichet, then head of the European Central Bank , and Mario Draghi, who was head of the Italian Central Bank. The two sent a letter to Berlusconi making clear he must pass reforms in order to receive help. The ECB kept its end of the bargain and began buying Italian debt on the secondary market to help bring down the country's interest rates. Berlusconi in the meantime, came up empty handed.
Just two weeks ago, Berlusconi promised once again, in a 14-page letter to the European Union that the Italy’s economy would be liberalized within months. Yet, he struggled to get even an agreement on raising the retirement age.
There is a growing consensus there may have to be a “technical” government in Italy, with the key characteristic being they don’t care about reelection. That way, they can pass many of the unpopular reforms: raising the retirement age, shifting more of the cost of health care to the individual, reducing the generosity of pensions and perhaps the most controversial of all: opening what are known as “closed professions.”
Nearly every occupation in Italy has some kind of barrier to entry, either in terms of licensing or fee requirements, or even controls on the allowable numbers. From lawyers, to notaries, to taxi drivers, and pharmacists, the list of professions that have some kind of government control is endless—and it leads to much higher costs.
This summer we profiled a taxi driver, Simon Galina, who faces “liberalization” of his profession, and he explained why he’s so worried about these reforms. (Click here to watch)
He borrowed more than $100,000 euros to buy a taxi license—the number of which are strictly controlled by the government. If those controls go away—fares will likely fall and it will be much harder to pay back his loan.
He understands that falling prices are good for consumers, will lead to more competition, and is good for the overall economy. However, it hurts him directly.