Populist camps in Italy edge closer to each other

What, they can get on!? That will probably be the main concern of most pundits and above all the capital markets when it comes to the possible cooperation in Italy of the two major populist groupings, the Five Star Movement and Lega Nord, in the struggle to form a government. As regards who gets which of the key parliamentary posts, this weekend the two parties on the margins of mainstream politics edged closer to each other and showed first indications of a willingness to cooperate. Even if they are separated by ideological and substantive differences, there is some common ground in the areas of Euroscepticism and refugees. A coalition of populists on the Greek model thus no longer seems completely impossible, especially as the options for forming a government have been significantly reduced by the Social Democrats’ decision to go into opposition.

Such an alliance, and it would clearly reject European fiscal laws, could definitely threaten the sustainability of Italy’s finances. Overall, things don’t appear to bode well for Italy’s finances. The economic upturn in Euroland as a whole is at present papering over the structural, fundamental cracks in the Italian economy. An about-turn in the ECB’s interest-rate policy together with the threat of a deep-pocket government spending policy and a potential economic cool-down in coming years constitutes a great risk to the Italian treasury. An alliance between the leftist and the right-wing populists would invariably lead to open conflict with Brussels, which might influence the process of agreeing on the EMU reform project.

In addition to Italy, other political risks continue to smoulder in the Eurozone, above all on its margins. While, for example, the ongoing fragile state of Greece poses a constantly latent source of difficulty, the Catalonia crisis in Spain is far from over and could flare up again at any time – as the most recent turbulence relating to the arrest of former Prime Minister Puigdemont demonstrates. At the moment, investors are evidently not paying much attention to these events. However, all that could change if the ECB bids farewell to its ultra-expansionary monetary policy.

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