Italy: Investors turn away

The Italian government is on the verge of collapse. After weeks of quarrels, Interior Minister Salvini yesterday called for new elections, effectively announcing the end of the coalition between the Lega and the Five-Star Movement (M5S). The latest dispute was triggered by the M5S’s decision not to approve the major TAV railway project. In the meantime, Prime Minister Conte has announced that he will ask Parliament the question of confidence, which he is very likely to lose. If the end of the coalition is officially confirmed, President Mattarella has the ball rolling. He must officially sound out possibilities for forming a new government or otherwise declare new elections. Since new majority constellations in parliament, such as an alliance between PD (centre-left) and M5S, are unlikely, new elections in mid-October are already being discussed. Until the ballot, the president could set up an expert government that would run the business, but possibly not have a parliamentary majority behind it.

The end of the coalition is no surprise, but it does hit Italy at an inopportune time. Parliament is currently on summer recess and the 2020 budget will be up for discussion from September. Italy will also have to present its financial plan to Brussels in October. A transitional government will endeavour to draw up a budget that meets the requirements of the EU Commission. However, neither Lega nor M5S, which together have a parliamentary majority, should agree to this in the middle of the election campaign. On the contrary: Salvini, whose Lega according to polls is just under 40% and who hopes to become the country’s next prime minister, is likely to speak out strongly in favour of a more expansive fiscal policy during the election campaign and thus against Brussels‘ austerity measures.

In the coming months, investors will have to live with the uncertainty that it is unclear who will govern Italy in the future and whether the new administration will later overturn any agreements between an expert government and Brussels. In view of Salvini’s extensive tax and expenditure promises, the probably future prime minister would be under pressure to confront Brussels on his budgetary policy if he did not want to appear untrustworthy on the domestic front. His political fall is high in view of the almost rocket-like rise to date. Many Italians expect Salvini to boost the economy at a rapid pace, having already turned the country’s migration policy 180 degrees in a short space of time.

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