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Financial Market Unfazed by Prime Minister Renzi's New Appointment

Financial market participants were unfazed by the most recent change of guard in Italy, and not just because of the perpetual instability that seems to be a hallmark of Italian politics.

The country’s new prime minister, Matteo Renzi, has reportedly committed to upping the ante on reforms that are badly needed to spur the country’s ailing economy. But his efforts may well be in vain, given that Italy’s coalition government—which made it virtually impossible for outgoing prime minister, Enrico Letto, to make headway on the reform process—continues to make it tough to pass any significant measure.

“One of the main problems in Italy is that the political parties in the coalition are going to have their eye on the next election, and that’s why it will be difficult to push through any drastic structural reform measures,” said Ben May, European economist at Capital Economics in London. “My personal view is that a change in prime minister alone is not going to be enough to see a change take place in the reform process, and if anything, you’re going to need another election to take place to give Renzi a more powerful mandate to push through reforms.”

Although Renzi has given his verbal commitment to serving out his full term as prime minister, the likelihood of that is yet to be seen, “and I don’t think we’re going to see anything dramatic happen in the near term unless there are elections to give him greater support,” May said.

Italy, though, is a nation badly in need of reform. Although the country is technically no longer in recession, the Italian economy is nevertheless in fairly dire straits, with a staggering public debt burden that’s close to $3 trillion, a lagging export sector and rising unemployment that continues to escalate, thereby underscoring the fact that the worst is far from over for the beleaguered nation.

Granted, Italy has lagged behind in terms of reform process because it’s been under less pressure to do so compared to countries like Greece, Spain and and Portugal, which had specific directives from the Troika to get their houses in order and faced greater market pressure than Italy. However, politics have also played a role in supporting the reform process, May said, and in Spain, the more stable political environment that tends to have single parties in power has made it easier to implement much-needed measures and special interest groups have been less of an issue there than they have in Italy.

The current crisis aside, Italy faces certain endemic issues that also need to be sorted out if the economy is to get back on its feet and gain strength for the longer term. The unequal distribution of wealth in Italy, for one, is a huge problem, and further to that, the country lacks proper measures to keep wealth that’s created in the country onshore.

According to research firm U.K.-based research firm WealthInsight, 41.5% of Italian wealth is reportedly held outside the country, a figure that’s much higher than the worldwide average of 20% to 30%. Multimillionaires account for 1.5% of the total wealthy population in Italy, which is over double the global average of 0.7%, and WealthInsight expects the number of multimillionaires to increase by 10%, to reach 3,992 individuals in 2017, up from 3,503 in 2012, and projects their wealth to increase by 16% to reach $495 billion by 2017.

However, Italy’s wealthy set tends to invest and keep their money outside the country and this has only increased as a result of the economic crisis, to the detriment of the already troubled economy.

“In times like these, you want your high networth individuals to be invested in the domestic market, or have in place measures that will bring money back into the domestic market at some point,” said Tom Carlisle, analyst at WealthInsight. “Italy has the worst track record in this regard compared to other European countries including Sweden, which has one of the highest tax brackets yet a lot of Swedish wealth is kept at home.”

As for Renzi, he’s promised to act quickly to create jobs, reduce taxes and cut back the stifling bureaucracy that weighs on the corporate sector – which may help, since Italy isn’t considered the friendliest place to do business, according to Carlisle.

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