Italy Has Room for ‘Smart’ Fiscal Easing, UniCredit Says

Any new Italian government would have room to cut taxes to foster political support for reforms provided it was done in a smart way, said Erik Nielsen, UniCredit global chief economist.

“The primary surplus is very robust, Italy has some room for easing,” Nielsen said at a Bloomberg panel in London today. “As long as there’s no backpedaling, no big silly fiscal expansion. It might not be a bad thing to let the economy stabilize.”

A general election in Italy this week produced a hung parliament and triggered a sell-off of Italian bonds, after anti-austerity parties led by former Prime Minister Silvio Berlusconi and comedian Beppe Grillo won about 55 percent of the vote. Grillo has since rejected a call by Democratic Party leader Pier Luigi Bersani to back a coalition.

“What Italy needs is a stable government -- whether it’s center right or center left as an investor I wouldn’t really worry too much,” Nielsen said. “The reforms we have seen over the past year should add something like 0.4 percent to trend growth over the medium term. That is in the pipeline.”

Lucrezia Reichlin, a professor of economics at the London Business School, warned at the same event that Italy faces an increased loss of confidence from investors if it pursues a tax-cut strategy.

“Assuming that because of the instability there will be an increase in the interest rates -- we will be very close to the boundary of stability,” Reichlin said. “We are going to be in this dangerous area. It will be very difficult for the political parties to do what they have promised in terms of decreased taxes.”

The panel discussion also included Mario Baldassarri, a former president of the Italian Senate finance committee, and Mediobanca Spa analyst Antonio Guglielmi.

Before it's here, it's on the Bloomberg Terminal.