Markets have been relaxed about the Italian election.1 Last year it was on the investment radar as a potential risk to the euro and the Eurozone, with the Five Star movement leading in the polls and expressing scepticism about the single currency. As they did well so the new leadership of Five Star toned down the anti-euro rhetoric, leading investors to think the threat had lifted. Paradoxically as Five Star moved to a less dramatic position, so its poll ratings started to fade a bit as well.
This year there has been an important development in the election which has been less remarked by investment commentators outside Italy. The Centre Right has formed a pre-election coalition with an indicative common platform. Together the four parties, Forza Italia, Lega Nord, the Brothers of Italy and Us with Italy now command around 38% of the vote, the largest single block by a decent margin. The centre left coalition is little more than the PD party, with around 26% of the vote. Five Star stays just a margin ahead of the centre left coalition in the polls and still refuses to join a pre-election coalition.
It means we do need to consider what an Italian government led by the centre right might look like and do, as they could well be in the strongest position to seek to lead the country after another inconclusive election for all the individual parties. This is not an easy task, as the two main parties in the possible coalition, Forza and Lega Nord, are neck and neck in the polls and are engaged in their own struggle to be the largest party within the grouping to give them more influence in any formal coalition talks, and above all to nominate the Prime Minister. Berlusconi, the leader of Forza, is by far and away the best known of the centre right leaders, and in some ways this election is about his rehabilitation as a politician after his sentence for tax offences. He is barred by court order from becoming Prime Minister, but is allowed still to be a party leader. Forza is usually just ahead and will presumably nominate a Prime Minister candidate if need arises. Berlusconi is reluctant to name anyone, probably intends to control things one way or another if he wins, and may even have in mind trying to reverse the court ban. Salvini, the leader of the Lega Nord is the other person we need to consider, as his party is close to outpolling Forza.
Berlusconi’s party has toned down its anti-euro and anti EU rhetoric and is posing as a more establishment party. The Lega Nord in contrast has put forward an aggressively anti EU Manifesto. Under the slogan of a Good sense revolution ( La rivoluzione del buonsenso), Lega argues that the Euro is a German currency that has done considerable damage to the Italian economy ( L’Euro e la principale causa del nostro declino economico). The Euro suits the multinationals but not the Italian people. The Lega wishes to leave the Euro, and repeal all the Treaties from Maastricht onwards, restoring Italian sovereignty. They want control of money, borders and laws, and a return to co-operation between European states.
The combined sketch of a platform they have produced as a coalition gives Lega a proposed law to establish the sovereignty of the Italian constitution over European law. It adopts their low tax strategy which is likely to result in breaking the EU deficit rules at least in the short term, and their wish to cut migration. This would be sufficient to put any such government at loggerheads with the EU. Italy will need to observe the rules on freedom of movement, and has gone a long way to make their sea frontier a common EU problem. Forza’s stark thetoric against inward migration is a direct challenge to the EU policy.
All this implies there is a bit more political risk in Italy than markets have come to assume. There could still be a government formed that excluded Lega and Brothers, the most anti EU parties. If the centre right does find a way of winning enough to lead a government it is likely to make more progress with tax cuts and a fiscal stimulus than with an agenda to limit EU power. This in itself will be another challenge to the prudent budget rules of the Eurozone. The short term election results and uncertainty over government building may trouble markets a bit. A reflationary lower tax policy if followed might then rally spirits about shares, and would be in line with policy in the US.
The above article was previously published by Charles Stanley on 20th February 2018
1 Italy goes to the polls on 4 March 2018