Italian instability is hiccup not crisis says Berenberg

The instability in the Italian political system means Italy is heading for only a modest hiccup and not a new full-blown crisis according to economists at Berenberg.

Berenberg's Italy update highlights the many dangers facing the Italian economy, which include the possibility of missing it's deficit target of 2.9 per cent of GDP. Should this occur, Italy would not for-fill the conditions for assistance from the ECB via OMT which could lead to severe difficulties in the bond market.

The easing of fiscal policy since the time of the last election which has continued ever since remains a point of concern. So much so that EU commissioner Olli Rehn visited Rome two weeks ago urging the Italian government to make greater progress cutting it's deficit.

However Berenberg chief economist, Dr Holger Schmieding asserts that there are many factors mitigating risk in Italy:

The Eurozone economy is back to growth and more resilient to contagion, thanks to the ECB’s safety net;
The VAT hike in Italy will improve the 2014 fiscal situation;
Vote of confidence unnecessary: last minute concessions by Berlusconi may still postpone a vote of confidence.
New elections unnecessary (I): Letta could win a vote of confidence cote with Berlusconi defectors;
New elections unnecessary (II): President Napolitano could order new coalition talks instead of new elections;
If there are new elections, maverick Grillo looks likely to fare less well than in February, according to polls;
If Berlusconi wins new elections, the centre-right could return to economically-sensible policies;
The centre-left could win outright in both houses with a new charismatic leader like Matteo Renzi.

Berenberg in early 2013 had noted Italian politics as the greatest risk threatening the modestly improving situation in the Eurozone. Better economic conditions and the declining support for unconventional political parties such as Beppe Grillo's five star movement, have helped to reduce risk in the Italian political system.
Berenberg acknowledges that the uncertainty that would ensue from fresh elections would be bad for both Italy and the Eurozone, however the bank believes that policy makers and markets are suitably prepared to handle the situation.