How to Profit from Italian Passage of Austerity Measures

The Italian Parliament is set to approve a set of austerity measures aimed at improving the government's fiscal position, lowering its borrowing costs and prodding growth in the eurozone's third biggest economy . Like those recently passed in Greece, the austerity measures include a combination of tax increases and spending cuts. Prime Minister Silvio Berlusconi has been uncharacteristically quiet this week in regards to the austerity measures. Berlusconi seems to be keeping a low profile because he is the subject of a number of trials centering on allegations of corruption and sexual misconduct on his part. Still, the government seems to functioning quite well without his public presence, which could be seen as a good sign because the Italian Prime Minister may be forced to step down due to his legal woes. While it is widely expected that the austerity measures will be approved by the Italian government, it's too early to tell how the Italian public will respond to the measures. Still, it's encouraging that the protests that have occurred so far have paled in comparison to the violent protests against austerity measures that have shook Greece on and off for more than a year. The public's reaction to passage of the measures is not just important because of how it affects the country's economy in the short term but also because international investors will partially judge the government's determination to stick with the reforms by the people's reaction to them. While the riots and general strikes in Greece over the past year couldn't have done anything to help the economy, they also made bondholders and other investors question whether or not the government will give in to demands and eventually scale back on reforms. So investors should watch closely to what happens in Italy over the next week if the austerity measures gain final approval today in Italy. The apprehension about whether or not the Italian government can stick to the reforms that it is set to pass may be partly to blame for Italian bond yields rising shortly before the vote takes place. The Italian government and the European Union hope that passing the measures will send a clear signal to the markets that Italy is serious about overcoming its financial woes and not flirting with default like Greece has been doing for so long. If investors feel that Italy is serious about tackling these problems, its borrowing costs will fall and it will become easier for the country to reduce its deficit. There are a number of ways for investors to trade, depending on how they see the situation playing out. If the austerity measures meet the government's goal of driving growth, the iShares MSCI Italy Index Fund EWI should see its share price climb higher. Investors who want to invest in a range of Italian securities should consider the iShares MSCI Italy Index Fund. Investors who think that the austerity measures are the first step in raising Italy's low economic growth rate and want the higher profit potential of individual stocks can choose from a number of Italian securities that trade on the New York Stock Exchange. STMicroelectronics STM, Telecom Italia TI and Luxottica Group LUX could each benefit if the austerity measures provide a boost to the Italian economy and all three trade as ADRs on the New York Stock Exchange. On the other hand, investors who feel that the austerity measures don't go far enough may want to take a look at the ProShares UltraShort Euro EUO. Even if the austerity measures pass, if the Italian public feels that they do the country more harm then good, the government may eventually be forced to back track on some of the reforms. There's also the risk that a default by Greece could lead to speculation that Italy could follow, thus driving up the country's borrowing costs and weakening the euro.