From Lira to Euro

Political Instability can be measured in many ways:

The number of times in a year in which a new premier is named and/or 50% percent or more of the cabinet posts are occupied by new ministers or cabinet changes (Ari Aisen and Francisco Jose Veiga (2011)

1997-01-01

1998-01-01

1999-01-01

2000-01-01

2001-01-01

2002-01-01

2003-01-01

2004-01-01

2005-01-01

2006-01-01

2007-01-01

2008-01-01

2009-01-01

2010-01-01

2011-01-01

2012-01-01

2013-01-01

2014-01-01

2015-01-01

2016-01-01

0

50

100

150

200

250

300

350Economic Political Uncertainty

Europe Italy

Italy has had over 60 governments since the end of World War II

2017201620152014201320122011201020092008200720062005200420032002200120001999199819971996199535

40

45

50

55

60

Total Current Expenditure (Percentage of GDP at market prices)

Germany France Italy Netherlands United Kingdom

201720162015201420132012201120102009200820072006200520042003200220012000199919981997199619950

2

4

6

8

10

12

Interest General Government (Percentage of GDP at market price)

Germany France Italy Netherlands United Kingdom

2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 19960

2

4

6

8

10

12 Implicit Interest Rate: General Government

Germany France Italy Netherlands United Kingdom

201720162015201420132012201120102009200820072006200520042003200220012000199919981997199619959

11

13

15

17

19

21Social Benefit others than social transfers in

kind: General Government

Germany France Italy Netherlands United Kingdom

2017201620152014201320122011201020092008200720062005200420032002200120001999199819971996199585

90

95

100

105Total Factor Productivity

Germany France Italy Netherlands United Kingdom

201720162015201420132012201120102009200820072006200520042003200220012000199919981997199619950

200

400

600

800

1000

1200

1400Total Export of Goods

Germany France Italy Netherlands United Kingdom

201720162015201420132012201120102009200820072006200520042003200220012000199919981997199619950

200

400

600

800

1000

1200Total Import Goods

Germany France Italy Netherlands United Kingdom

201720162015201420132012201120102009200820072006200520042003200220012000199919981997199619950

2

4

6

8

10

12

Interest General Government (Percentage of GDP at market prices)

Germany France Italy Netherlands United Kingdom

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

40

60

80

100

120

140

160

World Bank Indicator: Trade % GDP

Germany France United Kingdom Italy Netherlands

• Default and Inflation expectation can be read as a fear to the central banks monetize government debt and consequently boost inflation expectations, obligating to compensate, increasing nominal interest rates.

• Deficits can put pressure on resources, leading to a rise in the equilibrium interest rate in the economy in order to preserve the output level and a possible quickly increase of government debt may require an increase in interest rates if investors accept this new proportion in their portfolios.

Why debts and deficits might boost sovereign yields in long term ? :

1992

-01-01

1993

-01-01

1994

-01-01

1995

-01-01

1996

-01-01

1997

-01-01

1998

-01-01

1999

-01-01

2000

-01-01

2001

-01-01

2002

-01-01

2003

-01-01

2004

-01-01

2005

-01-01

2006

-01-01

2007

-01-01

2008

-01-01

2009

-01-01

2010

-01-01

2011

-01-01

2012

-01-01

2013

-01-01

2014

-01-01

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%

Government Bond Yields: 10-year, 3-Month Inter-bank Rates

Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for Italy

1997

-01-01

1998

-01-01

1999

-01-01

2000

-01-01

2001

-01-01

2002

-01-01

2003

-01-01

2004

-01-01

2005

-01-01

2006

-01-01

2007

-01-01

2008

-01-01

2009

-01-01

2010

-01-01

2011

-01-01

2012

-01-01

2013

-01-01

2014

-01-01

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0Government Bond Yields: 10-year & Political Un-

certainty

Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for ItalyPolitical Uncertainty

Critical Points

• Euro and Public Finance

• Italian Institutions and prosperity

In this third phase of euro, it is undoubtable needed to reform some rules in order to restore the prosperity in the economies. However, is important to highlight the role of euro in reducing the impact of negative political shocks.

It can be observed by the reduce of volatility in the 3-month interbank rates and Government bonds 10-year yields after 1999 and afterwards.

Conclusion