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Italian Politics: Implications for the Eurozone

• The new Italian government has a radical agenda involving lower taxes and higher spending, and a more combative attitude towards the EU
• The proposed programme is likely to make fiscal sustainability concerns worse without any compensating boost to growth
• We think that ultimately, the ECB will intervene to guarantee Italian solvency, but it is a question of how perilous the situation can become before intervention becomes necessary
• In the long run, the significant concern is that this makes the politics of Eurozone reform very difficult. If the banking union is not completed and some form of common fiscal policy not achieved, the Eurozone will remain severely exposed to any economic risk as it was in the aftermath of the global financial crisis

When does the ECB run out of bonds to buy?

If the self-imposed constraints of the ECB’s quantitative easing programme are respected, we estimate that the ECB will run out of eligible German Bunds (and German state and agency debt) to buy by mid to late 2018. We see this as the perfect excuse the ECB has for an early tapering of QE, as the Eurozone recovery consolidates.