How to Profit from Italian Protests Against Austerity Measures

Millions of Italians across Italy are thought to be taking part in a general strike to protest against their government’s proposed austerity measures that were expected to amount to 45.5 billion euros. The strike is disrupting everything from transportation to manufacturing, with government offices closing as well. The Italian government is hoping that the protests don’t get out of hand and lead to widespread violence like that seen in Greece during several riots that hit the country since Spring of last year.
 
The austerity measures are needed to restore the market’s faith in Italy and lower the country’s borrowing costs by reducing its deficit. Italy received some relief last month after the European Central Bank starting buying Italian bonds in an effort to keep Italian bond yields down after Italian Prime Minister Silvio Berlusconi announced that his country planned to pass austerity measures in order to reduce the deficit. Berlusconi’s announcement was in response to European demands that if Italy wanted European support it must pass austerity measures to show that it was serious about deficit reduction.
 
The Italian government was expected to pass the measures quickly but politicians have been arguing over the proposed measures. Like austerity measures passed in other troubled eurozone countries like Greece, Portugal and Spain, many of the proposals to cut spending and raise taxes are proving to be unpopular with the country’s people. Even plans to fight tax evasion may prove unpopular with people who have grown used to paying less than their fair share of taxes.
 
Passage of the austerity measures are also threatened by disagreements between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti. It hasn’t helped matters that Berlusconi is involved in yet another prostitution scandal.
 
Yields of Italian bonds have been rising higher, heading to the levels that were seen just before the European Central Bank decided to intervene by buying Italian bonds. European leaders are growing impatient with the Berlusconi government’s failure to push through the financial reforms that it promised, warning that European support for the Italian government shouldn’t be taken for granted.
 
While passage of the austerity measures was previously considered a sure thing, the combination of bickering politicians and striking workers has the markets spooked. While most still expect some form of financial reform to pass, it’s not certain whether or not the full 45.5 billion euro package of austerity measures will pass and that the Italian government will stick to them.
 
There are a number of ways for investors to play the developments in Italy.
 
Investors who feel that there is too much at stake for the Italian government to fail to pass the austerity measures might want to take a look at the iShares MSCI Italy Index Fund (NYSE: EWI) or Italian stocks that trade on American stock exchanges like Luxottica Group (NYSE: LUX) and Natuzzi (NYSE: NTZ). If Prime Minister Berlusconi and Finance Minister Tremonti are able to work together to ensure the passage of the financial reforms, the pressure on the euro should be reduced and Italy will look like a safer place to invest.
 
Investors who feel that Italy faces too much political and financial uncertainty may want to move money into the ProShares UltraShort Euro (NYSE: EUO), CurrencyShares Swiss Franc Trust (NYSE: FXF) or the SPDR Gold Shares (NYSE: GLD). Italy’s economy is much bigger than previous eurozone countries that denied they were in trouble only to seek bailouts later. If Italy isn’t able to fix its economic mess on its own, the European Union won’t find it as easy to bail the country out as it did with previous countries. If the cost to service Italian debt continues to rise, investors may start to short the euro and move funds to safe haven investments like the Swiss franc and gold.