THE new Italian prime minister, Enrico Letta, had two reasons to smile this week. On May 29th the European Commission recommended removing Italy from the excessive deficit procedure, the “sin bin” for those countries with dodgy public accounts (see chart). Two days earlier, Mr Letta’s Democratic Party (PD) emerged unscathed from local elections which, though partial, were the first test of opinion since he formed a ruling coalition with Silvio Berlusconi’s People of Freedom (PdL) movement.Release by the commission sends a positive signal to investors in public debt and should thus cut Italy’s already shrinking borrowing costs. That should help the economy since lower bond yields will enable banks to lend more cheaply.The local election results had several implications. They showed that linking with Mr Berlusconi was not as damaging to the PD as its former leader, Pier Luigi Bersani, feared. Mr Bersani had resigned after failing to do a deal with Beppe Grillo’s Five Star Movement (M5S).The results also make the coalition stronger. Mr Berlusconi will be tempted to withdraw his support as soon as he believes he can win an election. The polls had suggested the PdL…
