Populists supported by half of Italian voters. What's next?

Mar 5, 2018 3:53 PM|Marcin Lipka

“Although populist and eurosceptic groups gained support from nearly half of Italian voters, the markets reacted quite moderately to the election results from the European country. However, this does not mean that the political situation in Italy is stable,” writes Marcin Lipka, Conotoxia senior analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

Significant reshufflings in the Italian political scene and the growing risk of a eurosceptic government did not impair the euro. European currency quotes have not changed much compared to Friday's close.

Investors still count on a positive tide

The lack of a clearer euro price decrease or increase in Italian government bonds after Sunday's elections may be due to the fact that investors are always counting on a favorable scenario. This scenario would need to be a government creation by the Great Coalition, which would include right-wing parties (Forza Italia Berlusconi and the Northern League), as well as left-wing parties (such as the ruling Democratic Party).

This type of scenario was also anticipated before the election, but now has at least two weak points. The populist Northern League gained more votes than the Berlusconi party, which is actually the opposite from surveyed data. It means that the right-wing camp may set the rhythm, and it may also mean more skepticism regarding the consensus with the Left.

The Italian Right gaining the leadership position on by the Northern League also means that it can push its candidate to be prime minister. It also reduces the chances of creating a moderate coalition or for effective government survival. As a result, a positive scenario for the markets is less likely than before the weekend.

5 Star Movement - the leader

None of the surveys published since the beginning of the year exceeded 30% support for the 5 Star Movement. In the Sunday elections, the party won about one-third of the votes. This is a huge success for the movement founded by former comedian Beppe Grillo.

The victory mood was also dominant during the first post-election conference of the current movement leader. Luigi Di Maio stated that the election results are opening the way to governing. Maio added that he was open to talks with all parties, which may mean that earlier declarations of not wanting to form a coalition have been modified.

A eurosceptic coalition can’t be ruled out

Although the Northern League and the 5 Star Movement have softened their message about Italy’s participation in the Eurozone or the role of Brussels in the EU, it is worth remembering that their support is largely related to the skeptical Italian approach to the EU.

The level of GDP per capita of Italy in 2017 was over 3% lower than it was at the beginning of the millennium. The employment rate in Italy for the population aged 15-64, (currently the second lowest in the entire EU after Greece), was only 58.4% at the end of the third quarter of last year.

The analysis carried out by leading think-tank Bruegel ("Tales from a crisis: diverging narratives of the euro area") shows that the political system is the primary source of blame for the weak economic condition in Italy as well as the German/EU influence on the situation in their country.

The result of Sunday's elections confirms these analyses, which means that even if forming a government that is skeptical towards Brussels does not happen in the coming weeks, the risk of this scenario will remain elevated. This is a result of the Great Coalition’s hypothetical fragility, as well as strong, oscillating support for populist groups amounting to around 50%.

Mar 5, 2018 3:53 PM|Marcin Lipka

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