“The Italian elections may have brought uncertainty, but not risk”

Peter Garnry

Here we are, after the Italian elections. Now, what?

Many analysts and economists seek refuge in the word ‘uncertainty’ to describe the results as posing a risk for the entire eurozone. I don’t agree. Frank H. Knight said in his book “Uncertainty and Profit“, already in 1921, that “uncertainty comes from a not-known probability of future events, whereas risk exists when that probability is measurable in a way or another.” There is nothing in the information we have that makes us suspect that the Italian economy or the eurozone’s will be less certain within a year.

There is some degree of risk in the results of the Italian elections, but traders and investors can easily cover it hedging positions with credit spreads, for instance. A real uncertainty event will be Italy deciding to leave the euro next weekend, with consequences of which we have no previous statistics to guide us.

But isn’t it worrying the void in the Italian government, the lack of a clear majority party?

The true irony of this story is that these political voids have often generated periods of economic calm and even growth. During the Clinton government, for example, the political stakes were that he did not have the sufficient support to carry out the reforms he had planned. His government officials had to sit down, and the new legislation was shelved. The consequence was soft economic growth–there were other causes, to be sure, but then again, budget management didn’t suffer much. So why are there concerns in the case of Italy?  There isn’t even a clear majority that could cancel the Monti reforms…

Belgium is another proof of what I say: 535 days without government up to December 2011 and economic growth was higher than expected, also compared to its neighbours, and the budget deficit fell further than during the previous government. At the time, newspapers were full of catastrophic warnings, but nothing happened.

The reaction to the Italian elections is greatly exaggerated, although it’s nothing new. We must wait until we receive new information.

Perhaps the real risk is the lack of economic growth policies in Italy, and elsewhere.

According to data from Bloomberg, Italy is approaching its budget balance, so it is in a sound position in terms of fiscal responsibility. And in my opinion, there’s room for macroeconomic policies.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

1 Comment on "“The Italian elections may have brought uncertainty, but not risk”"

  1. I agree with Peter Garnry, the Belgian exemple shows that political void doesn’t prevent from passing bills that produce growth. Yet with Italy we need to nuance that. The general public in Italy (like France or Greece) is historically very sensitive to political void & is likely to turn political void into a social movement fueled by regional leaders & unions eager to benefit from this lack of national leadership. There is an opportunity for them to gain power by pressuringwhoever politician comes outta this for higher benefits & work-related rights after Monti’s unpopular reforms. Of course, poorly elected politicians will respond to those demands to gain more support for themselves despite the country’s macroeconomic situation —naturally, I’m talking politics of risk here, not economic risks per se. Therefore, in Italy we project uncertainty yes, with little political/social risk. But unlike Belgium I’m quite pessimistic about growth in the short/medium run.

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