Italy: populist alliance on shaky ground

The populist coalition in Italy is faltering increasingly. While M5S (Five Star Movement) and Lega were singing from the same hymn sheet last autumn in the fight against the budgetary requirements laid down by Brussels, the relationship between the coalition parties is now marked mainly by dispute. The conflicts revolve on the one hand around the migrant policy, as the right-wing populist Lega favours a particularly tough stance against immigration. On the other hand, major dissent surrounds both economic and financial policy as well as transport policy. Lega is going along somewhat grudgingly with the government plans on guaranteed basic income, while the left-wing populist M5S is opposed to expensive infrastructure projects such as the rail connection between Turin and Lyon (total cost of EUR 26bn).

Although both government partners have so far denied they are eyeing up a coalition, breakup, media reports state that Lega is already sounding out an alternative right-wing alliance with Forza Italia and the Brothers of Italy if a snap election is held. Based on the latest opinion polls, a right-wing alliance could anticipate gaining around 45% of the votes. However, since 36.8% of the seats are awarded using a majority voting system, the current approval ratings for the right-wing parties could suffice for an absolute majority of the parliamentary seats.

A coalition breakup would represent a double-edged sword for the market. On the one hand, a snap election would lead to a sudden increase in political uncertainty, which most investors would initially acknowledge with rising risk premiums. On the other hand, most investors would prefer a government with only one populist force, as M5S and Lega would no longer be trying to outdo each other on social benefits and tax cuts, so that the budget deficit could be less substantial. In a direct comparison between the two largest political forces in Italy, Lega - despite its critical stance towards migration - is considered more market-friendly, also given its ideas for lowering corporate tax. Poor economic data however is currently impacting on BTP/bund spreads. Italy not only slid into a technical recession in the second half of 2018, but the leading indicators also fell within the range of economic contraction – which has been another reason for investors to be more cautious recently.

Rate this article

Thanks for your rating. Your rating:
Current average rating of the article: 1.00

Number of comments: 0

Leave a message

Your email address will not be published. Required fields are marked *

Thank you for your message
Sorry, an error has occurred