Week Ahead (15 August)

W/C Monday, 15 August – Election campaigning resumes in Italy as new centrist coalition forms

Summer campaigning resumes in Italy ahead of the elections scheduled for 25 September, following the collapse of Mario Draghi’s government in July. According to polls, an alliance of right-wing parties led by Georgia Meloni and Fratelli D’Italia is likely to take power. Meloni’s party is currently polling at 23.8% and looks poised to form a coalition with fellow anti-immigration right-wing party Lega. Silvio Berlusconi’s Forza Italia could also join the coalition.

Last week, former Prime Minister Matteo Renzi and former industry minister Carlo Calenda, leaders of the two centrist parties Italia Viva and Azione, announced that they would team up to form a pro-EU coalition, aiming to act as a ‘’third pole’’ between the right and the left. Calenda had previously withdrawn from the centre-left coalition under the Democratic Party, which is currently lagging behind Fratelli D’Italia.

If Meloni emerges as Prime Minister there will be important political and economic implications for Europe; despite softening her anti-EU rhetoric, her party is traditionally ultra-conservative and openly Eurosceptic and has pledged to ‘’rediscuss’’ the Eurozone and some European treaties. There are increasing fears that a Eurosceptic coalition could jeopardise the progress made by Italy on its National Recovery and Resilience Plan (NRRP), as the country battles soaring inflation and an energy crisis, and could jeopardise the progress made by Italy on its National Recovery and Resilience Plan (NRRP) and weaken EU unity on multiple fronts at a particularly sensitive time.

Furthermore, an election victory would likely lead to a flight of capital, with borrowing costs expected to increase rapidly. A Meloni-led government would make it more difficult for the ECB to activate its recently unveiled Transmission Protection Instrument (TPI) in support of highly indebted Eurozone members, and in this context, it is very likely that the Italian borrowing costs will remain elevated in the coming months. Nevertheless, there are increasing signs that Meloni could opt for a more pragmatic approach, a shift that would be welcomed by investors, European political leaders, and EU officials in Brussels.

Tuesday, 16 August and Wednesday, 17 August – UK unemployment and monthly inflation figures to be published

UK unemployment and consumer price monthly inflation figures will be released this week, amid increasing fears that the UK economy is heading towards a protracted recession. Their release will come after Friday’s announcement that UK’s GDP is estimated to have fallen by 0.1% in Q2 2022, according to the Office for National Statistics (ONS). Last month, it was announced that the consumer price index (CPI) rose by 9.4% in the 12 months to June 2022, up from 9.1% in May, hitting a new 40-year high.

As it raised interest rates for the sixth consecutive time, the Bank of England (BoE) forecast inflation to peak at 13.3% in October, well above the previously predicted 11%. The BoE opted for a 50-basis point hike in August, constituting the UK’s biggest single increase in interest rates for nearly 30 years. The Bank also warned of the worst squeeze on living standards for more than 60 years, predicting that the UK economy will only start growing again in Q1 2024. Consequently, the economy and the ongoing cost-of-living crisis has been the headline issue so far in the Conservative Party leadership contest, given that outgoing Prime Minister Boris Johnson has repeatedly stated that he will abstain from taking any actions on economic policy in the last weeks of his tenure.

Frontrunner to replace Johnson, Liz Truss, is campaigning on a tax-cutting platform, including cuts to corporation taxes, and has flagged her intention to examine the Bank of England's mandate for setting interest rates. Emphasising the need to tackle inflation, former Chancellor Rishi Sunak has warned against saddling the next generation with debts, in reference to Truss’ plans to cut more than £30 billion worth of taxes. However, in response to Truss’ growing lead among party members, he has since pledged to cut the basic rate of income tax to 16% from 20%. Last week, Sunak unveiled a plan to help the poorest segments of the UK population, pledging to find up to £5 billion more to help them deal with the rapidly rising energy prices, aiming to put more pressure on his frontrunning rival who is against imposing windfall taxes on energy companies.

Thursday, 18 August - Eurostat flash GDP and employment estimate for Q2 to be released

On Thursday Eurostat will release its latest flash estimate of GDP and employment statistics for Q2 2022. The most recent release shows that GDP growth rates in the eurozone had fallen marginally between June and July (from 0.6% growth in June to 0.5% growth in July); for the EU as a whole the fall over the same period was the same, albeit from a higher starting point (from 0.7% growth in June to 0.6% growth in July).

Employment increased by 0.6% in the eurozone during Q1 2022, and by 0.5% in the EU as a whole. Growth is also seen in the number of hours worked in Q1; in the eurozone the increase was 1.1% while in the EU overall the increase was 0.9%.

Friday, 19 August - Scholz to testify in "Cum-Ex" case

The German Chancellor, Olaf Scholz, will appear before a committee in Hamburg on Friday to answer questions about his alleged link to the "Cum-Ex" tax fraud scandal. The salient events of the scandal took place in 2016, when Scholz was serving as Mayor of Hamburg; it emerged earlier in August that German police had found €200,000 in the safe deposit box of a close associate of the Chancellor who had served as an adviser to the head of the Warburg Bank at the centre of the scandal. Scholz has denied any knowledge of the scandal, in which he is alleged to have met senior executives of the Warburg Bank which had been seeking to have a demand that it repay €47 million received as an illegal tax refund dropped by Hamburg authorities.

Besides dealing with the scandal, Chancellor Scholz will also spend the week thrashing out the details of a new package of measures aimed at helping German citizens through the cost-of-living crisis.