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.