Our Opinion: 2018
Italy heads to the polls
Italy is having an election on 4 March. It’s likely to be messy. Given that Italy is one of the biggest and most-troubled economies in the eurozone, that has some people worried. Polls do not yet suggest an outright winner. The centre-right coalition is the front runner and enjoys good momentum, but it is still short of a majority.
While a centre-right coalition victory cannot be ruled out, the most likely scenarios are, in descending order of possibility, a centrist grand coalition, a technocratic government and repeat elections. A grand coalition would likely be well received by financial markets, in our view, because it could result in political stability and a continuation of current economic policies. Conversely, repeat elections could prolong the uncertainty and therefore weigh on Italy’s risk perception by financial markets. A technocratic government could press ahead with a few reforms, but their lifespan would likely be short lived. All these scenarios will require lengthy negotiations.
The outcome of the elections remains highly uncertain, as none of the major political parties or announced coalitions look likely to win an outright majority in parliament. The centre-right is enjoying the best momentum but still falls short of a potential majority. By contrast, the centre-left has been losing support. The Five-Star Movement (M5S) will likely end up as the largest political party, but without joining a coalition, it is unlikely to receive a mandate to form a government. Despite recently changing the manifesto to allow for alliances and to support minority governments through ad-hoc votes, the leaders of M5S have suggested they do not wish to enter coalitions. So, their relationships with other parties remain poor. So far, only some members of LEU have stated their willingness to discuss with M5S, but this is proving to be a divisive topic, even within the party.
The key issue for international investors is a simple one when it comes to any eurozone election. Will this election result in a country making a break for it, and thereby endangering the continued existence of the euro, and the eurozone financial system?
The populist Five Star Movement made noises about having a referendum to leave the euro. But they’ve pulled back from that because they realise that changing currency is too terrifying a leap in the dark for most people. So even if Five Star end up leading a majority government (which is highly unlikely), it’s hard to see a systemic impact on the rest of the eurozone.
19th February 2018