In the Italian general election, Pier Luigi Bersani, leader of Italy’s centre-left Democratic Party, failed to win a majority in the Italian Senate with his centre-left alliance. Bersani is now under pressure to provide Italy with a stable government to pull the eurozone’s third biggest economy out of an 18-month recession and help the country service its $2.6 trillion debt.
The urgently needed breakthrough for reform is now more unlikely than ever, as the likelihood of forming a coalition government with either Beppe Grillo, leader of the Five Star Movement, or Silvio Berlusconi, leader of the centre-right People of Freedom Party, seems unlikely. Markets are set to remain nervous in the coming weeks as Italy’s borrowing costs rose to the highest level in four months at an auction of a new 10-year bond issued during the week.
In the meantime, Federal Reserve chairman Ben Bernanke pledged to continue with monetary stimulus for the US economy as the central bank will keep on buying bonds by printing money. Despite being aware of the potential risks of inflation, the Fed is currently more concerned to promote a stronger economic recovery and more rapid job creation. Also, data published last week showed that the housing sector is no longer a drag on the US economy, as home building added to growth last year for the first time in seven years and sales of previously owned homes approached a near three-year high during January.
Moreover, the $85 billion in across-the-board spending cuts planned for 2013 will not all take effect immediately as from last Friday if Congress does not reach a deal to replace them. Instead, the cuts – split between defence and domestic programmes – will be introduced gradually over the coming months.
European Central Bank president Mario Draghi supported the Federal Reserve’s decision and signalled that the bank has no intention of tightening monetary policy in the near future as inflation is projected to undershoot its two per cent target for 2013. Draghi said that although conditions on the financial markets are improving, there is still room to drive the economy for a “gradual recovery”.
This article was compiled by Bank of Valletta plc for general information purposes only.