Earlier this month, Matteo Salvini, leader of Italy’s Northern League and interior minister, was feeling confident about his chance of getting the top job. On August 9, his party issued a motion for a vote of no confidence against the sitting Prime Minister, Giuseppe Conte, a consensus independent politician. The vote was postponed several times, until today. If, as expected, the vote passes, it will force Italy’s president into either calling for new elections or installing a new government.
From the beginning, Salvini’s strategy has been clear. His far-right party has recently been enjoying a peak in popularity after it took the most votes in the country’s EU Parliament elections, receiving over 34% of the votes (it won just 18% of the votes in the General Elections the year prior).
Amid growing discontent with his coalition partners, Salvini had hoped to build on the momentum and ditch his coalition partners, bring down the government and force a general election that would grant him full control of the government. This, in turn, would allow him to deploy his long-time proposal for radical expansionary fiscal policy, mostly by reducing taxes.
This “fiscal shock”, he argues, will kickstart the country’s lethargic economy. The EU, however, has been worried: data from 2018 show a growing fiscal deficit as well as public debt, which rose to 132% of GDP last year, breaking the EU’s fiscal rules. This forced the EU commission to threaten the country with a disciplinary process that could ultimately lead to financial sanctions unless the government demonstrates that it is working to balance its budget. The outlook of a potential prime minister that is expressly looking to expand the fiscal deficit, let alone reduce it, has understandably worried EU leaders.
But Salvini’s master plan seems to be in peril. A deal reportedly brokered over the weekend between the Democratic Party, which governed until 2018, and the Five-star Movement could see them being able to form a government, which would avoid the need to trigger a general election.
This latest development will likely appease investors, something that Italy badly needs. The country’s high debt levels render it extremely vulnerable to high financing costs. The bottom line, however, is that Italy’s current political class appears stripped of any convincing plans to boost the country’s economy over the longer term.
In an announcement yesterday, the UK government said that the right of EU citizens to live and work in the country without restriction would be ended immediately after October 31 in the event of a no-deal exit. This is a swift change from the previous policy of gradually phasing out freedom of movement rights.
Prime Minister Boris Johnson also said he wants to explore different ways to prevent a hard border on the island of Ireland. In a letter, the Prime Minister asked the European Council President, Donald Tusk, to drop the Irish backstop from the Withdrawal Agreement. Johnson, however, did not propose anything else to replace it with.
Ahead of his official visit to Denmark later this month, Donald Trump said that it would be strategic and nice for the US to buy Greenland. Last night, Trump appeared to be joking about buying the territory from Denmark on Twitter, but his comments, which he has expressed on a number of occasions, have triggered a response from the Danish government. “Greenland is not for sale... I really hope that it’s not something that is seriously meant” said Denmark's new Prime Minister.
In a meeting yesterday, French President Emmanuel Macron and Vladimir Putin raised the possibility of a new round of negotiations to end the conflict in eastern Ukraine. The almost forgotten conflict, which has been ongoing for over five years and has claimed over 10,000 lives, has been in a stalemate after two failed to negotiate attempts to end it.
Business & Economy
The leaders of nearly 200 companies, including the CEOs of Apple, Pepsi and Walmart; issued a statement on Monday asking the public and regulators to redefine the role of business in society. The association, Business Roundtableargued that companies should no longer prioritise the immediate interests of shareholders but instead, they must also deliver value to customers, invest in their employees, protect the environment, deal fairly and ethically with their suppliers, protect local communities and generate long term value for shareholders.
US authorities delayed the ban on Huawei once again, which will allow American technology companies to continue buying and selling its products for another three months. The Chinese manufacturer was placed on a blacklist in May over accusations that it is helping the Chinese government to spy, something it denies. The ban would have prohibited US companies from dealing with Huawei, a potentially fatal blow; but the restrictions have been delayed twice already to allow US companies to find alternative suppliers.
The Bank of England’s Governor Mark Carney dismissed the idea of negative interest rates for the UK economy at this point in time. After the publishing of sluggish economic performance data for the British economy, the Bank of England began to think about joining other Central Banks around the world in cutting rates, something it had previously resisted.
What happened yesterday?
Hopes of fiscal stimuli, lower rates from central banks and the recent cooling of tensions between China and the US lifted global equity markets yesterday.
In London, the FTSE 100 was up 1.02% at 7,189.65, while the pound was down 0.1% against the US dollar at 1.2119.
The sentiment was similar in Europe: the Stoxx 600 rose 1.14% to 373.86, the German Dax 1.32% to 11,715.37 and the FTSE Mibtel added 1.93% to 20,715.49.
In the US, The Dow Jones Industrial Average ended the session up 0.96% at 26,135.79, the S&P 500 added 1.21% to 2,923.65, and the Nasdaq 100 was 1.52% stronger at 7,719.32.
The positive sentiment pushed investors towards riskier assets, drawing money away from safer assets such as bonds and gold: the latter fell 1.2 per cent to $1,495.84 per troy ounce.
What's happening today?
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Columns of Note
On Bloomberg, Tyler Cowen says that most predictions about China’s future fail to consider the human capacity to shape events. When the country joined the WTO in 2001, many thought it would liberalise, but it didn’t. Even fewer people thought that the Communists would take control and succeed in implementing a growth plan over the largely agrarian country at the time, or that the country would avoid an economic crack up in 2010, something that was common knowledge. This is fairly normal. Very few people predicted the fall of the Soviet Union, the Iranian Revolution and the subsequent rise of Islamic radicalism. The latest groupthink about China – that it isn't going to liberalise – could follow the same path. The reality, says Cowen, is that China will always surprise us. Like all major civilisations, China is large, complex, and hard to understand.
Writing for the FT, Tony Barber argues that democracies must be checked and fixed from time to time to work well. A growing class of disenfranchised voters are feeling powerless and unrepresented in political and economic systems that respond inadequately to their needs. This is a life threat to democracies around the world. We must start paying attention to the fundamental flaws of our system, and address them accordingly, says Barber. This could be done by expanding participation in public life and creating new forums to operate alongside traditional parliaments and parties. But most importantly, we need to reach the estranged: any serious attempt at reviving democracy must include a sustained effort to protect living standards and improve economic opportunities.
Did you know?
In March, golf lovers can join the Ice Golf World Championships in Uummannaq, Greenland. The two-day event takes place on a course cut on the ice, between icebergs and out in the snow fields.
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