Will New Governments In Europe Help The Eurozone Crisis?

24.11.11

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While I am not in the habit of writing about politics, it is hard at the moment to separate it from financial news when it comes to the Eurozone crisis and the effect this is having o

While I am not in the habit of writing about politics, it is hard at the moment to separate it from financial news when it comes to the Eurozone crisis and the effect this is having on investment assets. European politics have again been dominating the investment scene and recent events could have an influence on the crisis ? hopefully a good one.

In the space of a few weeks Greece, Italy and Spain, countries at the heart of the Eurozone crisis, have all had changes of government.

Two phrases keep cropping up in the press when reporting on the new Italian and Greek leaders – ?technical government? and ?technocrat?. Considering both Greece and Italy installed technical governments, I thought it might be useful to provide a definition as to what exactly these terms mean.

A technical government (or technocracy) is a form of government where technical experts (technocrats) are in control of decision making in their respective fields. Within a technical government, decision makers would be selected based upon how knowledgeable and skilful they are in their field. The technocrats make decisions based on specialized information rather than public opinion. As unelected experts they are supposedly apolitical and therefore they can hopefully rise above political bickering and implement unpopular choices. For this reason, they are sometimes called upon when there?s no popular or easy solution to a problem – for example, the current European debt crisis.

Within Europe there have been previous instances of technical governments being installed, most recently in the Czech Republic (2009-10) and Hungary (2009). Prior to that, Italy resorted to a technical government on three occasions during the 1990s and Greece had a technocrat as their Prime Minister in 1989-90.

Firstly it was Greece, who on 11th November installed the technocrat Lucas Papademos to lead an emergency government. Papademos was previously vice president of the European Central Bank (ECB) and also boasts an impressive academic CV. He was once governor of the central bank of Greece, but that is his only public office. At the beginning of November Papademos was a lecturer at Harvard and part-time economics adviser to former leader George Papandreou and now he's the prime minister.

The general consensus is that the 64-year-old has the experience and expertise to get debt-stricken Greece out of its economic predicament. He should at least not be out of touch with the task that awaits him, the course he was teaching at Harvard is entitled “The Global Financial Crisis: Policy Responses and Challenges”.

Italy also swore in a new government on 17th November, to replace Silvio Berlusconi?s outgoing party. This new technical government is led by former EU commissioner, Mario Monti, and is made up only of technocrats and no politicians.

The following excerpt from The Economist does a good job of highlighting the differences between the outgoing Berlusconi government and the incoming technical government:

?Silvio Berlusconi, a prime minister notorious for his buffoonery, scandalous private life and iffy business methods, has given way to a sober, monogamous academic and former European commissioner, Mario Monti. The TV mogul?s cabinet included a former calendar girl, a minister who walked a pig on land earmarked for a mosque and another said to have links to the Cosa Nostra. The new government sworn in on November 16th has the chairman of NATO?s military committee, Admiral Giampaolo Di Paola, as defence minister; the boss of Italy?s biggest retail bank, Corrado Passera, as minister for economic development and infrastructure; and no fewer than seven professors, including the prime minister, out of a cabinet of 17. Mr Monti himself takes the finance portfolio.?

It is hoped that Prime Minster Monti will be able to quickly enact the austerity program that was passed on 11th November and begin restoring the Eurozone?s third largest economy to good health. Alarmingly, Italy has averaged a mere 0.75% annual economic growth rate over the past 15 years. By 18th November he had won confidence votes in both houses of parliament for the government?s future reform programme.

Spain had a general election on Sunday 20th November where the conservative Partido Popular (PP) party won a landslide victory, ousting the current socialist government which voters blamed for failing to tackle Spain?s economic woes.

Aiming to avoid the need for a bail-out, party leader Mariano Rajoy promised that he would introduce ?serious? and ?profound? austerity measures. ?Spain will no longer be the problem [in the EU]?, he said after the elections, ?but part of the solution?. He did however warn that there was no ?miracle recipe or magic potion?, and indeed markets did not appear to immediately take heart from the news.

Although Spain?s debt to GDP ratio is very healthy in comparison to other EU nations, the incoming government has difficult issues to tackle such as an annual growth rate below 1% and an unemployment rate exceeding 20%.

Analysts expect that Rajoy will prioritise growth strategies, announce plans to further restructure Spain?s banking system and enforce extra recapitalisation and continue with fiscal consolidation to ensure the country is solvent.

By Bill Blevins, Managing Director, Blevins Franks

21st November 2011

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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