View on Italy: beyond the short term

The end of the political crisis and next steps for the new government: The new pro-European government looks to be willing to move in a different direction vs the previous one, with an agenda focused on green and socially inclusive policies. It is difficult to project how long this new coalition will last, but it will certainly have to address the next budget law. We expect to see some expansionary measures (lower labour costs plus investment spending), but without putting public finances at risk. However, the available room for manoeuvre is narrow.

Italy vs the EU: The change in the relationship with the EU is the most important shift regarding this new coalition, keeping in mind that it voted for Ursula von der Leyen as new President of the European Commission. The new Italian Finance Minister will likely be able to obtain the maximum level of flexibility allowed at the EU level, but this will not lead to meaningful fiscal expansion in Italy. The good news is that momentum is building with the EU for some accommodative fiscal measures, but completely new rules are not something that Italy should hope for in the short term.

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