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Populism wins in Italian election, but uncertainty reigns

A surge in support for populist parties and right-wing policies has led Italy into a hung parliament and has put leader of the Democratic Party, Matteo Renzi, under pressure to resign. Italy is now likely to endure uncertainty whilst a government is formed.  

Here, Moneyfarm looks at the possible outcomes of the Italian election and the impact this could have on markets.

Whilst no single party won enough votes to form a government in the Italian elections – as expected – it was populism that emerged the clear winner, with over 50% of voters marking a cross by the names of populist parties with a history of anti-EU rhetoric in the booths.

Five Star Movement shines

It was the Five Star Movement that shone the brightest with Italian voters, with the party securing 32% of the vote. Founded by comedian Beppe Grillo but with Luigi Di Maio now at the helm, Five Star has been the most popular party since 2017.

Di Maio has harnessed discontent towards the establishment into the party, proposing a minimum monthly income of €780, raising the budget deficit, make early retirement easier and raising taxes on energy companies.

He’d initially been against forming a coalition. As the party gained momentum and edged closer to power, the leader seemed more willing to join forces to take advantage of this once in a lifetime opportunity.

With three-quarters of the vote counted, the centre-right coalition fronted by Silvio Berlusconi was within an inch of getting an absolute majority of seats with 37%. The coalition had been stitched together with his own party, Forza Italia, anti-immigrant and anti-euro Northern League, and two smaller right-wing parties, including Brothers of Italy.

Forza Italia was keen to abolish housing, inheritance and road tax, doubling the minimum pension, and introduce a minimum €1,000 a month income. Policy also included blocking new immigrant arrivals.

There was a shift of power in the coalition on election day, however, with the League winning more votes than Forza Italia to become the largest conservative party in Italy. This would make it difficult to form a German-style coalition with the Democratic party – an option initially considered by pundits.

Led by Matteo Salvini, the League wanted to introduce a flat tax of 15% for all, allow for earlier retirement, and repatriate 100,000 illegal immigrants a year.

Matteo Renzi, of the centre-left Democratic party, is under pressure to resign after suffering a humiliating defeat in the election, which now opens up the opportunity for the Democratic Party to work alongside with the Five Star movement.

The Democratic party had initially hoped to be at the centre of coalition talks, but after haemorrhaging support, its negotiating power has weakened significantly.

With Italy turning its back from the establishment, this is a severe blow for the EU from one of its founding members and the third largest economy within it.

Whilst Italy has been a staunch supporter of the bloc over the years, more than half of voters picked Eurosceptic parties, which will be a concern for supporters of the union – especially as France’s Emmanuel Macron and the newly formed German coalition push for European integration.


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What next for Italian politics?

This hung parliament won’t come as a surprise for many who have watched the Italian elections unfold. Italy’s seen around 90 governments since the start of the 20th century, so uncertainty is something they’re accustomed to.

Here are four scenarios that could play out and their potential impact on the market. President Sergio Mattarella will manage the forming of a government. Although he will likely try to avoid both the third and fourth outcomes, the constitutional figure holds no veto power.  

  • Centre-right coalition with some extra external support

It’s hard to predict how the markets will react to a centre-right coalition, but they might be protected by the label ‘centre right’. With the Northern league now able to throw its weight around a bit more, the markets might begin to react negatively later down the line – especially if they take a harsh euro-sceptic position.

  • Five Star Movement government – supported by Democratic Party

This could be the most puzzling yet progressive outcome. Markets may translate this to mean that Five Star may not dramatically change the course of government. It would mean that the government would be skewed to Five Star’s political agenda, although it’s still slightly unclear what this is.

  • Populist outcome – Five Star Movement with The League

The markets will see this unprecedented coalition as a worst case scenario, that has the real potential to rip up the government rule book. This outcome could spell a difficult time for markets.

  • Italy will go back to the polls

If Italy can’t form a coalition, a temporary placeholder government may be responsible for changing the electoral process again, before another election. The markets have already priced this in, so would not be taken by complete surprise if this turns into reality. It’s not the first time this has happened in Europe, and it might not be such bad news for markets as you might expect.

Italy’s changing electoral system

Italy has made three big changes to its electoral system over the last quarter of a century, but it seems the latest edit had many Italian’s scratching their heads at the polls.

The new Rosatellum system was introduced in 2017 after the previous electoral process was deemed unconstitutional, however many have criticised it for actively trying to stop the Five Star Movement from getting into power with its first past the post element.

In this election, 61% of the seats will be awarded by national proportional representation – that’s 193 seats in the upper house and 386 in the lower house. Around 37% of the seats will be elected under a ‘first past the post’ system by single-member constituencies – this equates to 116 in the upper house and 232 in the lower house.

Those Italians living abroad will elect 12 seats in the lower house and six in the upper – around 2%.

All parties must meet the 3% threshold to be represented in the proportional seats. If a party fails to break the threshold and is linked to a larger party, these votes will be transferred.  

Voters got two slips, one for each house, and were required to put a cross on each.

How have markets reacted to Italian election result?

In early trading, the strongest reaction was seen in the spread between Italian and German bonds, which jumped 10 basis points to 1.41%. Whilst the euro initially strengthened on news from Italy, it unwound again as the Italian election results start to come in.

In times of political uncertainty, a strategy that focussed on spreading risk across regions can do well. By diversifying your investments you hope to offset any short-term fluctuations with gains made elsewhere.

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