Italy’s vote may spark volatility
Right-wing populism makes gains in polls
As Italy’s March 4 election approaches, investors can take comfort in the fact that both the poll- leading Five Star Movement and t he right-wing Northern League, have eased off their threats to hold a referendum on the country’s membership in the eurozone.
Not only does the Itali an constitution require the support of two- thirds of parliament to cancel an international treaty, but citizens seem to realize that the risks of leaving the European Union could be greater than remaining.
Nonetheless, the EU and investors across the globe shouldn’t start celebrating just yet, according to Angelo Katsoras, a geopolitical analyst at National Bank Financial.
“The outcome of this election could pose a significant challenge to Italy and the EU,” he said. “The Italian election could also reignite volatility in the European financial markets. Unlike Greece, its much larger size means there is a much greater risk ( that) what happens in Italy will not stay in Italy.”
One reason for concern stems from the pledge by each of Italy’s main political parties to undermine the EU by ignoring its budgetary rules.
Another is the fact that former prime minister Silvio Berlusconi’s Forza Italia and the Northern League, which could form a coalition with the fascist Brothers of Italy party, have put forward the possibility of a separate domestic currency, while keeping the euro for international trade.
Another important development came from Lorenzo Fioramonti, a top economic adviser to the Five Star Movement, who called on the EU to debate the restructuring of Italy’s sovereign debt.
Katsoras noted that Italy is fortunate that its borrowing costs have been kept low by the European Central Bank’s quantitative easing program. The ECB has purchased 319 billion euros ($ 498 billion) of Italian debt since 2015, but as the program winds down, bond yields and borrowing costs may climb.
The analyst highlighted some other issues Italy is grappling with, i ncluding just four- per- cent total cumulative GDP growth since 2000, a year after the eurozone was formed.
The country’s unemployment rate of 11 per cent is much higher than the eurozone average of 8.7 per cent, and youth unemployment is 33 per cent.
Meanwhile, the difficult economic environment has forced people to leave Italy, with official figures putting the number of those moving abroad at 1.5 million between 2007 and 2017.
At the same time, the country has become the primary gateway into Europe for migrants, more than 600,000 of which have come to Italy since 2014, putting a big strain on the country’s resources.
Katsoras noted that while opinion polls suggest Italy’s right- leaning political bloc will come up a little short in forming a majority, support for the centre-right has been underestimated in the past.
For example, Berlusconi’s bloc entered the 2008 election up by just two points, but went on to win by more than nine percentage points. Similarly, the Democratic Party-led coalition had a sixpoint lead ahead of the 2013 election, but it evaporated into a very small victory after the vote.
“The most destabilizing scenario for the EU would be a strong performance by the Five Star Movement,” Katsoras said, noting that it could partner with the Northern League, another populist party running on anti- EU platforms. “The joining of these two forces would set Italy on a collision course with the EU.”
If there is no clear winner, as the polls currently indicate, there will likely be months of negotiations that end with a new election, or a very fragile coalition. In this scenario, Katsoras noted that it will be very difficult to pass much-needed economic reforms.
Italy’s election follows the success of anti- establishment forces elsewhere in Europe.
Spain’s Popular Party won a minority government in October 2016, following 10 months of political turmoil and two elections, as separatists in Catalonia continue to put up a fight.
Traditional mainstream parties in The Netherlands saw their support plunge in the April 2017 election, and the far- right Freedom Party is now the biggest opposition.
“Even Germany, long a bastion of political stability, is not immune,” Katsoras said, noting that support for its two main parties has plummeted below 50 per cent.
RISK (THAT) WHAT HAPPENS IN ITALY WILL NOT STAY IN ITALY.