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Italy's weak economy, political issues taking toll on EU's economic health

English.news.cn   2013-03-05 20:11:08            

By Eric J. Lyman

ROME, March 5 (Xinhua) -- The economic recession in Italy was confirmed by the latest reports from the National Statistic Institute, which confirmed that the country's economy contracted significantly in 2012, with more economic problems expected going forward due to the continued drag of the country's uncertain political situation.

ISTAT reported last week that Italy's economy shrank by 2.4 percent last year compared to 2011, its worst year-on-year growth rate since 2009 and the ninth time in 11 years that Italy's growth trailed that of the European Union as a while.

Other indicators were bad as well, with unemployment rates, consumer confidence, and the country's overall tax burden all worse in 2012 than in 2011, according to ISTAT figures.

The main economic indicator trending positively for Italy in recent months has also taken a turn for the worst over the last week, as the country's borrowing costs have risen markedly since voting in the country's national elections closed last Monday with a stalemate: center-left candidate Pier Luigi Bersani, the pre-election favorite, won the most votes, narrowly edging former prime minister and billionaire business mogul Silvio Berlusconi.

But Bersani lacks the votes to gain a majority in the senate, parliament's upper house, without striking a deal with either Berlusconi or comedian-turned-activist Beppe Grillo, who leads the Five Star Movement emerging strongly before the general election in Feb. 24-25.

So far talks between the three main blocs have failed to yield a result. On Monday, the possibility of new elections emerged, further spooking markets.

The lack of a clear result is driving Italy's borrowing costs sharply higher, closing Monday with a yield of 4.91 percent in secondary market trading for the country's benchmark 10-year bond.

That is the closest the bond has closed to the 5-percent threshold since November. It reverses a downward trend that started in late 2011, after Berlusconi resigned and was replaced by technocrat Prime Minister Mario Monti.

Over that time, bonds yields fall from well above the unsustainable 7-percent level to a low of 4.09 percent in late January.

"Starting in late January, about a month before the election, Berlusconi and Grillo started to make gains in the polls and investors started to become nervous," said Oliviero Fiorini, an analyst with Milan-based ABS Securities. "Now that nervousness has turned into a real fear that Italy's economic problems will return," he added.

Fiorini said investors, especially internationally, fear that if Berlusconi or Grillo had a strong influence on Italy's economic policies, their populist platforms would make the country's bonds a less attractive investment than it was under Monti. He said investors who have sold Italian bonds have reinvested the cash in safer bonds, like those of Germany, driving yields lower there.

But while Italy's woes may have helped lower borrowing costs in the more stable European Union countries, it has been a net loss for the 17-nation euro zone, where investor jitters have weakened the euro currency against other major currencies. The dollar reached its strongest point against the euro in nearly three months on Monday.

Additionally, the news out of Italy has helped drive up borrowing costs in other troubled euro-zone economies including Spain, Portugal, and Greece. If that helps push those countries closer to new requests for bailout money, that would have ripples across the EU.

The European Central Bank said Monday it is concerned, with the bank's governor, Mario Draghi, saying the euro's strength and the EU's economic prospects will be on the agenda when the bank's policy makers meet March 7.

Editor: Luan
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