Eye on the Market I November 9,2011 JP Morgan Topic: Are markets too focused on Prime Ministers and not enough on Economics? US super-committee trading cards Italy and the lesson of the last decade: Finance and Economics Trump Politics every time Markets were favorably anticipating resignations of Italian and Greek prime ministers, although it is not clear to me that it matters that much. The premise: resignations would lead to faster structural reforms, implemented by coalition governments led by technocrats. The logic: both Papandreou and Berlusconi are either too associated with austerity measures, or had too many domestic political opponents, to get things done. In Greece, there is chaos after Papandreou's resignation, since there is no new government, and it is unlikely that a hastily formed new one will have any legitimacy as it seeks to ply one last disbursement from the EU. In Italy, passage of austerity laws and a new government could prompt the ECB to increase bond purchases to stabilize Italy's crumbling debt markets, and/or allow the IMF to play a larger role by offering Italy a credit line. However, if Italy ends up having general elections instead of an interim coalition government run by technocrats like former EU Commissioner Monti or former PM Amato, the market's premise of accelerated Italian reforms may be disappointed. Even if a new Italian government enacted structural reforms, they take a long time to "work", and usually entail less growth (rather than more) right after they are passed. This is particularly true for the labor market reforms Italy is being asked to implement. The bet Italy and the EU are making: by passing structural reforms (at the cusp of a recession), the growth penalty will be offset by markets having more confidence in long term growth prospects, and therefore regain appetite to buy sovereign debt. Europe is pursuing this route since it plans to rely on private capital (not just it's own) to create a lever