Jittery

European Markets

The First Signs of Financial Contagion Spread out from Italy

It is now almost certain that the next Italian government will be composed of a coalition of the two least EU-sympathetic parties in Italian politics, the northern league (Lega Nord) and the 5-star movement (M5S). 

Yet despite this, the single currency is trading at 1.1825 against the US Dollar at the time of writing - back up above the key 1.1800 level. Against Sterling, it has risen to 0.8750, and versus the Yen to 131.20. Although it is down versus SEK, NOK and AUD, it is firmly higher versus the majors - surprising considering the new Italian government poses the greatest threat to the integrity of the Eurozone since the Macron-Le Pen presidential election.

 The coalition's economic policies are radical: they want to cut taxes and raise public spending bringing an end to the economics of 'austerity'. 

The poorest in society will receive a basic income of 780 Euros a month. An extra 2bn Euros will be invested in job centres. Pension rules will be relaxed and free childcare provided to help working parents. 

On the tax front it wants to lower the basic rate of tax to 15% and simplify the system into just two tiers of 15%, and 20% for higher earners. It wants to increase the tax-free allowance for families by 3,000 Euros, scrap a controversial new VAT law, and reduce or eliminate duty on petrol and electronic cigarettes. 

Lower taxes and higher spending will probably increase the Italian budget deficit to above the 3.0% limit tolerated by the EU, however, the coalition is not concerned about this as it believes the EU should reform its fiscal rules to make them more socially-orientated.

DYI