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Forex: Euro Faces Further Hurdles with Surprise Monti Resignation

Forex: Euro Faces Further Hurdles with Surprise Monti Resignation

David de Ferranti, Currency Analyst

THE TAKEAWAY: The Euro may face further selling pressure after Mario Monti unexpectedly announced plans to step down as Italian Prime Minister as soon as this month.

Italian Prime Minister Mario Monti has announced over the weekend that he will resign once the 2013 budget has been passed. The announcement brings uncertainty in the region over who will lead the Eurozone’s third largest economy amidst an ongoing recession, rising unemployment and high public debt. Speculation against the Euro may ensue as question marks are again raised over whether new leadership can keep the government’s pocket book constrained while steering the beleaguered nation back to growth.

Why the Resignation and What Does it Mean?

Monti’s resignation was prompted by the withdrawal of support by the PdL party headed by his predecessor Silvio Berlusconi. The former PM has essentially pulled the plug on Italian parliament so that the ruling coalition will be unable to pass legislation, leading to a collapse in government.

In a country whose former leader was forced to step down over a sex scandal, fraud allegations and intense public scrutiny, Monti represented a pillar of stability. Since his appointment as PM in November of last year, he has led parliament to approve austerity measures in an attempt to improve the government’s fiscal position. His actions acted to calm markets and have lowered Italy’s borrowing costs considerably since he took office.

Where To From Here?

Elections are presently slated for February 2013 with the Democratic Party (PD) leader, Pier Luigi Bersani, tipped as the early favourite. The successful candidate will inherit the job of trying to get the local economy out of recession and lower unemployment from the highest rate since April 1998 while trying to slash the government’s debt level.The renewed political turmoil in Italy raises more concerns over whether Eurozone leaders can seek agreement over how to tackle the ongoing debt crisis.

Markets have continued to witness political impasse in the region over EU budget talks and the disbursement of bailout funds. Additionally the ECB recently revised downward their Eurozone GDP growth forecast to a range of -0.4% to 0.6% for 2013. Against this backdrop of negative growth and embittered political rivalries the Euro may face further selling pressure.

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