Uncertain Prospects for Italy and Cyprus

Installation of a new government in Italy and the first effects of the newly approved bailout in Cyprus provide some modestly optimistic data points for an otherwise weak euro area outlook.

For Italy, a Fresh Start, a Youthful Team, but No Guarantees of Success

In Italy, Enrico Letta has taken office as the prime minister, heading a coalition of his own center-left Democratic Party, former Prime Minister Silvio Berlusconi’s People of Freedom Party, and the centrist Civic Choice bloc of former Prime Minister Mario Monti.1 Some see this new grouping as another “technocratic” regime, a Monti 2.0, but with a few more politicians in key positions. But that is a matter of debate.

Letta himself is a centrist. A nephew of Berlusconi’s chief of staff, he started his career in the disgraced Christian Democratic Party, which collapsed in the “Clean Hands” corruption scandals in 1992–94. At the age of 25, he became president of the center-right European People’s Party’s youth wing, before joining the center-left predecessor of the Democratic Party in 1994. He was the youngest ever government minister (for European affairs) in the late 1990s and has been his party’s deputy secretary since 2009. Letta is decisively a Europhile, a former member of the European Parliament and author of wonkish books with titles like Dying for Maastricht and Dialogue around Europe. In a party long dominated by elderly former Italian communists, including Italy’s president, Giorgio Napolitano (once described as Henry Kissinger’s favorite communist), Letta’s ascension shifts the left toward the center, potentially turning the party into a more modern collection of European social democrats.

The new cabinet, moreover, is dominated by seasoned and safe veterans as well as technocrats. The minister for the economy and finance is 70-year-old Fabrizio Saccomanni, director general of the Bank of Italy and a former close associate of Mario Draghi, president of the European Central Bank (ECB). The new foreign minister is a 65-year-old old former European commissioner, Emma Bonino, the first woman in this post. The head of the government statistical office and a former chief statistician of the Organization for Economic Cooperation and Development (OECD), Enrico Giovannini, is labor and welfare minister. The career bureaucrat Anna Maria Cancellieri shifts from interior minister under Monti to justice minister. Angelino Alfano, a 42-year-old ally of Berlusconi (and another former Christian Democrat), is deputy prime minister and interior minister.

But whether this generally capable, pro-European government, which enjoys a broad majority in Parliament, can pursue needed structural reforms is a difficult question to answer. Italy’s problems are deep and have been festering for decades, and it seems unlikely that they can be solved during a single parliamentary term.

One factor to watch is the extent to which Letta and his relatively youthful team can compete against Bepe Grillo, the volatile comedian and leader of the Five Star Movement, which has chosen to remain outside the government. Letta himself is nearly 20 years younger than Grillo, who may be able to seize the mantle of “agent of change” with that generational advantage alone.

Grillo’s decision to remain outside the government, despite his movement’s success in getting more than a quarter of the votes in the election, could mean that his influence has peaked. Grillo will probably need to share the political limelight with younger members in order to duplicate his success in the next election, even if Letta’s government fails to restore economic growth and reform momentum. In this bleak scenario, fear for the future is likely to outweigh anger at the establishment as the main political concern for many still affluent Italian households,2 and they are likely not to forget that Grillo refused to capitalize on his political success to make a difference in the Italian crisis.

For Cyprus, a Risk of Delay in Lifting Capital Controls

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