Prodi quits, opening the doors to a realignment in Italian politics

 

The end of Italy's 61^st government

Prodi resigns after Senate votes down his foreign policy

Romano Prodi's nine-party rainbow coalition collapsed last night, after the Senate, the upper house of the Italian parliament, failed to endorse the government over its foreign policy. At stake were two issues, Italy's continued involvement in Afghanistan and the expansion of the US military base near Vicenza in northern Italy. The Senate voted by 158-136 in favour of the government's foreign policy, but this was two votes short of the absolute majority of 160 needed. The defeat came due to abstentions by two government senators, one Communist, one Pacifist. The Italian foreign minister, Massimo d'Alema, had already threatened a day earlier that the government would have to resign if it did not get votes. After the defeat, and several hours of consultations, Mr Prodi offered his resignation to President Giorgio Napolitano, who accepted it. The Prodi government has lasted only nine months, during which it focused on economic reforms and a deficit-cutting budget.

The story naturally dominates the Italian press coverage this morning. Corriere della Sera devoted its first 13 pages to the end of the Prodi government. The following are summaries of the some of the reports and comments from Corriere. For an English-language news summary, see the FT's news story.

What happens now?

In Italy the president has important powers during a government crisis. He has now the foll

1. Ask Mr Prodi's to form another coalition

2. Ask some else from within the nine-party governing coalition to form a coalition

3. Ask an outsider to lead a “presidential government” with a view to holding new elections.

4. Dissolve the Senate (which would lead to Senate elections only)

5. Dissolve the Lower House (which would lead to election of both houses).

The Role of d'Alema

It appears that the outcome of this vote was to some extent an accident – some life senators did not turn up – and to many it came therefore as a total surprise. After the vote, there were several hours of heated discussions between Prodi and his allies, during which they pondered a number of options, including whether to ask the Senate for a vote of confidence (which the government would probably have won). The politician most opposed to this course of action was foreign minister Massimo d'Alema. Corriere devotes large parts of its coverage – and its front page commentary – to him. D'Alema had announced the day before the vote that “the government will go home” if it lost the vote, thus putting Prodi under pressure right from the start. He has raised the stakes rhetorically in many ways, speaking for example about “the hour of truth” ahead of yesterday's vote. The vote was preceded by weeks of intra-coalition wrangling about Afghanistan and the Vicenza military base, and d'Alema had several times questioned the loyalty of some of the coalition partners.

D'Alema argued forcefully that failure to support the government's foreign policy amounts to a de facto vote of no-confidence. D'Alema, a former PM himself, is one of the leaders of the Democrats of the Left (DS), the biggest social-democrat party in Italy, and one of the main components of the Olive tree alliance (the other is Margharita, led by Francesco Rutelli, like d'Alema also a deputy PM). In a front-page comment, Ernesto Galli Della Loggia, the historian and Corriere editorialist, said d'Alema had done something that few Italian politician ever dared to do: talk frank and consistently. In his forthrightness, he showed a truly statesman-like behaviour over the last few weeks. No politician has come out of out with more honour than him. This article reads like an endorsement for d'Alema to become the next PM.

How about a realignment of Italian politics

The stoic persistence of d'Alema indicates that it is unlikely that we are going to see a simple re-run of the present coalition. D'Alema and many others in the government believe that they do not have a majority to govern effectively. One option that is coming up again and again in discussion is a broader realignment of Italian politics. The two leading players in this debate are Piero Fassino, head of the Democrats of the Left (who decided not to become a member of the government himself), and Pierferdinando Casini, the leader of the Christian Democrats (who was a junior partner in the Berlusoni government). Immediately after the vote, Corriere reports, Fassino called Casini and asked to stand ready. Any form of co-operation between the centre-left and the centre-right is unheard of Italian politics, but there are more and more Italian politicians open to the idea of a Grand Coalition that could deliver solid majorities. Berlusconi and Fini predictably attacked Prodi, calling for new elections yesterday. Casini, meanwhile, who has broken with Berluconi, yesterday called for calm and reflection. It appears that he is keeping his options open for now.

There are two other co-operation options for the centre-left coalition: an alliance with a separatist Lombardy party, which together with another splinter group has 10 senators, or an alliance with Marco Follini, a former Christian Democrat, who fell out with Casini and set up his own party. Another possibility is to focus on a change of the electoral law, and hold new elections afterwards. Walter Veltroni, mayor of Rome, said yesterday: “What happened in the Senate is the consequence of the electoral law, which produces political instability in the country, a situation which should be addressed by all political forces in the country.”

French elections: Royal’s financing plan

The financing of Segolene Royal’s 100 point programme was detailed yesterday by Socialists MPs Didier Migaud and Michel Sapin. Total costs would accumulate to €50bn until 2012, savings to €15bn, implying a net financing cost of €35bn, to be stretch over five years, as promised earlier. The biggest spending items are research (€5.3bn), universities (€5bn), 50,0 000 first-time transitory employment measures (€4.5bn), anti discrimination measures (€4.5bn) and national education (€3.4bn). Savings will be incurred through cuts in enterprise subsidies (€5bn) and the transfer of competences to the regions reports Le Monde.

The yen weakened after BoJ interest rate increase

The BoJ raised interest rates on Wednesday from 0.25% to 0.5% as widely expected. The decision came after the news that fourth quarter GDP grew 4.8 per cent on an annualised basis. A strong stock market performance and continued weakness of the yen are said to have also influenced the BoJ decision. Despite the increase, the yen sank to another all-time low against the euro. The FT reports in its currency column that the markets expect the BoJ not to raise interest rates fast enough to curb the carry trade, the main reason behind the yen’s weakness in recent months. The BoJ indicated that further rate increases would be ‘very gradual’ and that monetary policy remains ‘extremely accomodative’.

EDF – hostage of the French political campaign

The EDF, the French electricity company, has been caught up in the election campaign, argues Patrick Lamm in an oped in Les Echos. EDF with 87% of its shares owned by the state, was spared polemic attacks by the left, although EDF’s profits are up by 73% to €5.6bn. But trouble is ahead. Segolene Royal implied by her announcement of a “public energy pole” a merger between EDF and Gaz de France that will cost the state €13bn-€14bn and will most probably meet resistance from the European Commission. Meanwhile Nicolas Sarkozy has the idea to sell up to 15% of the shares and use the proceedings (in the order of €17bn) to finance his reforms. This would not be the interest of EDF, argues Lamm. He said that the money should instead remain at the disposition of EDF to finance new European alliances to measure up against German E.on and the Spanish Iberdola.

The German Dax up to new heights

The German Dax broke the 7000 mark for the first time since 2000, reports Handelsblatt. Analysts go out of their way to explain that this time the circumstances are completely different from those in 2000 (as they did then, too). This time, they argue share prices are backed up by high profits, while acquisitions are paid for in cash and not by shares – as happened in 2000. Given a favourable global environment and low inflation, investors are optimistic that the boom will last.
 

 

Greece - the bad news and the good news

Greece's current account deficit widened from 7.9% in 2005 to 12.1% of GDP in 2006, the highest in the euro area, reports Kathimerini. Since Greece has joined the euro area, cheap money has sparked a borrowing boom of Greek households to finance consumption and house purchases. The central bank warned that this, in combination with a deterioration of the economy’s competitiveness, would increases its external debt and would not be sustainable. The bank argues that Greece needs a sustained growth rate based on exports and business investment instead.

Meanwhile the Greek government had to defend its upward revision of Greek GDP by 25% against claims that this would cost lead to higher Greek contribution to the EU budget (which is based on member states' GDP). Greece had to stop regarding the European Union as a fund. It is not the poor relative and should be increasingly assume its due responsabilities, said the finance minister Giorgos Alogoskoufis, as quoted by Kathimerini

Inflation peak in Ireland

The inflation rate in the Irish economy is forecast to reach a six-year peak in January 2007, reports the Irish Times. Analysts expect the inflation rate to be over 5%. The ESRI institute expects a rate as high as 6%. The inflation rate is to be re-weighted today, and may probably rise even further under the new weighting scheme. Economists warned that this rise is due to higher electricity prices and higher indebtedness. Austin Hughes, IIB Bank economist, said that the increased level of indebtedness magnifies the impact of interest rate hikes on inflation. But the inflation rate is expected to cool down throughout the year.

There are now signs that the Irish mortgage market cooled down somewhat, and may have shown no annual growth in the fourth quarter 2006 reports the Irish Times. Pat Farrell, IBF chief executive, considers this as a result of the six ECB interest rate hikes between December 2005 and December 2007. The figures show that first-time buyers are steadily retreating from the market. Speculation about stamp duty changes may also prompt people to delay their decision to buy property. Competition in the mortgage market is high with 16% of the homeowners moving their mortgage to a new lender.

Solbes dismisses fears of a hard landing

In an interview with the FT Pedro Solbes, the Spanish finance minister, expressed his confidence that the current slowdown in the construction sector - which absorbs many immigrant workers - is offset by an activity boost in tourism, agriculture and services. He defies worries about a hard landing of the Spanish economy. Amid a healthy eurozone economy combined with healthy corporate financing and consumer demand he sees no reason to expect any dramatic slowdown. The level of indebtedness of Spanish households is close other EU countries and only exceptional in terms of its growth rates. “But this has gone hand-in-hand with increased asset values and wealth”, Solbes says. Investment in capital equipment rose be 9.7% in 2006, seen as an indication that Spanish companies plan to increase their capacities. Spain’ s output growth reached 4% in the fourth quarter, and 3.9% for 2006, its 11^th consecutive year of expansion.

 

Surplus for Germany's unemployment insurance

In Germany, record low unemployment yielded a budget surplus for the national unemployment insurance scheme, according to the federal labour agency, reports Frankfurter Allgemeine. This prompted new calls for cuts in unemployment contributions. The government coalition already lowered contributions by employers and employees from 6.5% to 4.2% at the beginning of this year. Christian Democrat Gerald Weiss, head of the committee for employment and social affairs, told the paper that a cut from currently 4.2% to 4% should be possible, though this is currently opposed by the SPD. For 2007 the number of registered unemployed was revised downwards to reach 4.2m on average. In 2006 unemployment reached record low of 3.99m in November while employment went up to 39.7m in the last quarter of 2006. The recovery in the labour market is estimated to yield a record surplus of more than €11bn for 2006.

 

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