Enrico Letta’s government is poised to be installed starting today, as the end of two months of political turmoil in Italy was marred by the shooting of two policemen outside the prime minister’s office in Rome.
Italy’s new leader will address Parliament at 3 p.m. local time, followed by a confidence vote in the Chamber of Deputies needed to install the government. The Senate will hold its vote tomorrow. Letta managed to assemble a coalition by forging an alliance with former premier Silvio Berlusconi, whose support virtually guarantees the success of the confidence votes in the euro-zone’s third-biggest economy.
A gunman in a business suit shot the policemen yesterday, one in the neck and the other in the leg, before being wrestled to the ground while Letta and his Cabinet were being sworn in at the nearby presidential palace. The 49-year-old assailant told investigators he wanted to shoot politicians after losing his job during Italy’s worst recession in more than 20 years.
The attack “doesn’t bode well because it’s a reflection of the discontent in the country, which is suffering from the recession and the austerity wanted by Monti,” said Giuseppe Di Taranto, professor of financial history at Rome’s Luiss University. “The tax pressure has gone too far and many people are desperate.”
Outgoing Prime Minister Mario Monti raised taxes and cut spending to rein in Italy’s finances and bring the budget deficit within the European Union limit. The austerity deepened the downturn, and Letta, 46, inherits an economy in its eighth quarter of contraction. The jobless rate of almost 12 percent is the highest in more than two decades.
Italy held elections in February after Berlusconi withdrew his support from Monti in December, and the vote produced a hung Parliament, with Letta’s Democratic Party winning a majority in the Chamber of Deputies and falling short in the Senate. Democratic Party leader Pier Luigi Bersani resigned on April 20 after failing to form a government, paving the way for Letta.
Monti’s efforts to shore up Italy’s finances have helped keep bond yields in check, with Letta beginning his tenure with two-year yields near a record low. The yield on the benchmark 10-year bond fell 11-basis points today to 3.95 percent, near last week’s 2 1/2-year low. The Treasury was rewarded by investors today who bought 3 billion euros ($3.93 billion) of new 10-year debt at 3.94 percent, the lowest at auction since October 2010.
“I expect a moderately positive reaction to the new Italian Cabinet as finally the stalemate is over and Italy can start to work on reforms and plans to boost the economy,” said Giuseppe Belfiori, head of research at FT Support, an advisory firm in Milan. “Investors will now focus on the first moves by the government in a very tough environment.”
Letta, the third-youngest Italian premier since World War II, tapped rival political parties and non-politicians to build his 21-member Cabinet. He named a record seven women, including former EU Commissioner Emma Bonino as foreign minister. There are two nationalized Italians, including Cecile Kyenge, a 48- year-old doctor from the Democratic Republic of Congo, as minister for integration. Letta also appointed Bank of Italy veteran Fabrizio Saccomanni as finance minister. Saccomanni was Mario Draghi’s deputy before Draghi left the Bank of Italy to become president of the European Central Bank.
“Fabrizio Saccomanni at the Italian Ministry of Economy and Finance should be regarded as a market-friendly outcome,” said Francesco Galietti, former adviser to Finance Minister Giulio Tremonti. “Saccomanni is good news.”
Letta tapped Angelino Alfano, general secretary of Berlusconi’s People of Liberty party, as deputy prime minister and interior minister. Anna Maria Cancellieri, interior minister under Monti, will serve as justice minister. European Affairs Minister Enzo Moavero Milanesi remains in the same role and the Defense Ministry went to Mario Mauro, an ex-Berlusconi ally and member of Monti’s Civic Choice party.
The new prime minister through his alliance with Berlusconi managed to recast the coalition that stood behind Monti. While the deal gives Letta a majority in parliament, he must manage the competing agendas of his Democratic Party and forces loyal to Berlusconi to find common ground on policy.
“While the latest news is positive for markets, the task of the new prime minister won’t be an easy one,” Loredana Federico, a Milan-based economist for UniCredit SpA (UCG), wrote in a note to investors today. “A fragmented parliament and a government coalition backed by rival parties until yesterday leaves some uncertainty on how the urgent economic and institutional reforms Italy needs will be tackled.”
Letta’s party favors progressive taxation and counted on the support of labor unions at the polls. The party identifies itself as center-left and brings together ex-Christian Democrats including Letta and former communists like Bersani. People of Liberty is calling for cuts to public spending and appeals to entrepreneurs and professionals.
Letta will be pushed to tackle a new election law -- to reduce the probability of future stalemates -- justice reform and changes to the labor-market that economists say is needed to boost productivity. He will also have to address Berlusconi’s demands to revoke a property tax on primary residences passed by Monti.
Berlusconi, a three-time premier, told Canale 5 television today that eliminating the property tax on first homes should be a top priority for the government. The pledge was central to Berlusconi’s campaign for the February elections and helped him narrow the Democratic Party’s lead before the vote and deny it a majority of seats in the Senate.
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