Weekly Comment from Swedbank Investment Center: New government in Italy and upwards for the Swedish economy

30-04-2013 11:11

Italy has a new government, a broad coalition between different parties and with Enrico Letta as Prime Minister. A weak dollar and a large domestic market is boosting the U.S. economy. In Sweden, new orders in industry increase, albeit slowly.

After two months without a government and with tough government negotiations, Italy has finally formed a new government. The right, the middle and the left parties together in a coalition, led by Prime Minister Enrico Letta, the leader of the largest left party in Italy. Silvio Berlusconi did not get a Cabinet seat. However, his loyal protégé, the controversial lawyer Angelino Alfano, was appointed Deputy Prime Minister and Interior Minister.

The choice of ministers is controversial, with many unfamiliar names and several women. A well known name, however, is the former European Commissioner Emma Bonino, who is now foreign minister. The new government also means a rejuvenation, with Enrico Letta as Italy's youngest prime minister ever.

The comedian Beppe Grillo, leader of the Five Star Movement, has announced their role of opposition, but is prepared to support certain reforms.

Want to see more stimulus

In an initial statement Letta says that he "vigorously will devote himself to change the course of European politics that have been far too focused on austerity measures, which he no longer believes is enough."

- And he may be right, says Sara Arfwidsson, market strategist at Swedbank Investment Center. A balance between austerity and stimulus is needed to get the wheels rolling again. Had Italy itself ruled over its monetary policy, they could meet austerity measures with a more expansionary monetary policy. As Italy is part of the Eurozone they must accept the monetary policy of ECB.

Balanced fiscal policy

Even though the ECB now runs a stimulative monetary policy of low interest rates and easing in some areas, it is not enough for all EMU countries. So the question for Italy's new government is how they should pursue a fiscal policy that is both easing and tightening. For example, Berlusconi's party demands  immediate tax-cuts.

- Today Italy issues new government bonds. The interest rate will be an indication of the international confidence in the new government, says Sara.

Sweden and the U.S.

As for Sweden and the U.S. financial news have been dominated by corporate reports and the signals they send to the market. United States is characterized by a weak currency, which benefits American exports. Furthermore, their domestic market is large and many companies are doing well.

The situation in Sweden is the opposite. Our strong currency dampens profits for exporters. The most influential factor, though, is the difficult macroeconomic situation, with a weak Europe holding back demand.

- On the positive side, however, we see an increase in orders for the industry, says Sara. Orders rise more than sales. It means that we have now reached the bottom of the economic cycle. Many companies also have good profitability, which has resulted in high dividends 

.

After two months without a government and with tough government negotiations, Italy has finally formed a new government. The right, the middle and the left parties together in a coalition, led by Prime Minister Enrico Letta, the leader of the largest left party in Italy. Silvio Berlusconi did not get a Cabinet seat. However, his loyal protégé, the controversial lawyer Angelino Alfano, was appointed Deputy Prime Minister and Interior Minister.

The choice of ministers is controversial, with many unfamiliar names and several women. A well known name, however, is the former European Commissioner Emma Bonino, who is now foreign minister. The new government also means a rejuvenation, with Enrico Letto as Italy's youngest prime minister ever.

The comedian Beppe Grillo, leader of the Five Star Movement, has announced their role of opposition, but is prepared to support certain reforms.

Want to see more stimulus

In an initial statement Letta says that he "vigorously will devote himself to change the course of European politics that have been far too focused on austerity measures, which he no longer believes is enough."

- And he may be right, says Sara Arfwidsson, market strategist at Swedbank Investment Center. A balance between austerity and stimulus is needed to get the wheels rolling again. Had Italy itself ruled over its monetary policy, they could meet austerity measures with a more expansionary monetary policy. As Italy is part of the Eurozone they must accept the monetary policy of ECB.

Balanced fiscal policy

Even though the ECB now runs a stimulative monetary policy of low interest rates and easing in some areas, it is not enough for all EMU countries. So the question for Italy's new government is how they should pursue a fiscal policy that is both easing and tightening. For example, Berlusconi's party demands  immediate tax-cuts.

- Today Italy issues new government bonds. The interest rate will be an indication of the international confidence in the new government, says Sara.

Sweden and the U.S.

As for Sweden and the U.S. financial news have been dominated by corporate reports and the signals they send to the market. United States is characterized by a weak currency, which benefits American exports. Furthermore, their domestic market is large and many companies are doing well.

The situation in Sweden is the opposite. Our strong currency dampens profits for exporters. The most influential factor, though, is the difficult macroeconomic situation, with a weak Europe holding back demand.

- On the positive side, however, we see an increase in orders for the industry, says Sara. Orders rise more than sales. It means that we have now reached the bottom of the economic cycle. Many companies also have good profitability, which has resulted in high dividends. 

Sara Arfwidsson, market strategist at Swedbank Investment Center