Italian Prime Minister Enrico Letta said Thursday he would resign the following day, sparking market jitters over the economic policies of a government headed by a new prime minister.
Speculations are high on local media that 39-year-old Democratic Party secretary Matteo Renzi could succeed Letta to head the country’s third government in ten months and become the youngest prime minister since the creation of the Italian Republic following World War II.
But the question on the lips of many Italians is whether the new prime minister will be able to pull Italy out of its long-lasting economic malaise.
Angelino Alfano, a junior member of the Letta government, said Renzi’s vigor and leadership skills, combined with positive gross domestic product growth numbers for January soon to be released, set the stage for Renzi to hit the ground running.
But the truth is probably less certain: while Italy’s economy grew very slightly in the fourth quarter of 2013 and most economists predict positive growth for 2014 as a whole, the economy as a whole has shrunk in per capita terms over the past five years and that is unlikely to change this year.
Unemployment levels remain high in Italy despite the early indications of a gradual economic turnaround, and consumer confidence levels remain near all-time lows.
Recent polls showed Renzi’s higher popularity than other political figures in Italy. Polling firm Opinioni reported earlier this month that nearly 60 percent of Italians have a “very positive” or “somewhat positive” opinion of the fiery Tuscan while nobody else is above 40 percent.
Renzi may be banking on his wide support to give him a mandate to push through difficult reforms — but it remains unclear what those reforms may be.
“The challenges a Renzi government will face are enormous,” said Javier Noriega, chief economist with investment bankers Hildebrandt and Ferrar in Milan. “He has said he wants to create jobs and economic growth, but so far we have little indication how he will do that.”
It is clear that investors are at least a little nervous about the possibility that the problems may be more difficult than Renzi and his supporters believe.
The news of Letta’s imminent departure was widely anticipated, but when it was made official late in the trading day Thursday investors reacted immediately, sending the blue-chip index on the Milan Stock Exchange down by more than 1 percent, while the yield on Italy’s benchmark ten-year bond inched higher on secondary markets, closing at 3.80 percent.
The spread — the difference of the yield from bonds in two markets — between German and Italian debt widened by an even larger margin, reaching 210 basis points in after-hours trading compared to 201 the day before. PNA