Renzi Wins Merkel Praise Before First Test in Italian Senate

Italian Prime Minister Matteo Renzi’s government faces confidence votes in parliament this week, the first test since taking office for the 39-year-old who rose to power as a critic of the political establishment.

Renzi will address the Senate at 2 p.m. in Rome today to introduce his 16-member cabinet and outline his strategy for government including a new electoral law and economic stimulus. A ballot is due at about 10 p.m., followed tomorrow by another confidence vote in the Chamber of Deputies, the lower house.

The new Italian leader is the third premier in a row to take control of the euro area’s third-largest economy without winning an election. Renzi’s challenge now is to engage a fractious parliament that brought the last three governments to early ends.

“I don’t think he’s going to lose the confidence vote,” said Nicola Marinelli, who helps oversee $200 million at Sturgeon Capital Ltd. in London. If parliament were to refuse its support today, “they would look foolish. But it’s a risk down the road.”

Renzi, who was sworn in as premier on Feb. 22, goes into this week’s parliamentary test buoyed by the support of German Chancellor Angela Merkel for his program. Merkel clashed with then-Prime Minister Silvio Berlusconi in late 2011 as contagion from Greece began to hit Italian borrowing costs, when she urged him to take more reform steps to reassure investors.

Merkel Call

Merkel, the leader of Europe’s biggest economy, called Renzi yesterday on the eve of the confidence votes to congratulate him on his appointment and to “wish him every success in his policy of reform,” her chief spokesman, Steffen Seibert, said in an e-mailed statement. Renzi accepted her invitation to visit Berlin next month, Seibert said.

The arrival of a new government has also been welcomed by bondholders, who pushed Italy’s 10-year yield down 17 basis points this month as Renzi toppled Enrico Letta from the premiership and assembled the support to take power.

The yield on Italian 10-year bonds rose 2 basis points to 3.62 percent at 11:48 a.m. in Rome, after hitting eight-year lows last week. The FTSE MIB index in Milan fell 0.6 percent to 20,265.06.

Renzi is arriving in Rome from Florence, where as mayor he acquired the nickname “Demolition Man” for his campaign to force generational change in politics.

While his government’s policy objectives are partially changed with the transition from Letta, the ruling coalition in the legislature is expected to remain mostly the same. At the top of Renzi’s priorities are a new electoral law and constitutional changes like the abolition of the Senate. There may be continuity with Letta’s fiscal strategy of funding payroll tax cuts with reductions to public spending.

EU Ties

Particular attention will be given to the approach Renzi takes to the European Union and budget requirements like the rule against deficits of more than 3 percent of gross domestic product. Policy makers in Italy are under increasing pressure to boost deficit spending to break the cycle of recessions that has given the country four contractions since 2001.

The new government won’t violate the EU deficit limit, Renzi’s undersecretary Graziano Delrio said yesterday in a televised interview on state-owned RAI. Renzi is unlikely to antagonize EU allies and the commission’s budget inspectors, said Francesco Galietti, founder of Rome-based research firm Policy Sonar, noting that Renzi has already met in Berlin with Merkel, the chief advocate of fiscal restraint in the EU.

“I don’t think there’s going to be a challenge” to the Merkel orthodoxy, Galietti said. A more appropriate description of Renzi’s approach is “engaging,” he said.

Finance Pick

Renzi’s choice of finance minister, Pier Carlo Padoan, suggests consistency with Letta and with former Prime Minister Mario Monti, both of whom appointed non-politicians to the post. Padoan, the former chief economist at the Organization for Economic Cooperation and Development, has been criticized by Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, who said the new minister helped promote budget austerity as a remedy for the sovereign debt crisis.

Padoan was sworn in today after returning from a Group of 20 nations meeting in Australia, the president’s office said in a statement.

The biggest test of Renzi’s strength will come in the Senate, where he will need the support of at least three parties to carry the necessary 161 seats of the 320-vote chamber. To get there he is relying on his Democratic Party, which has 108 seats, as well as smaller parties that backed Letta. Chief among these groups will be the NCD, led by Interior Minister Angelino Alfano.

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