Political uncertainty won’t help Italy’s recovery

Italy prepares to vote

Italian voters prepare to cast their ballots in this weekend’s election. The result is expected to be announced early afternoon on Monday. However, with many Italians still undecided, the only certainty appears to be uncertainty. Expectations are for a hung parliament and a possible coalition that could take months to form.  

Right-wing coalition in front 

According to the final polls, the populist Five Star Movement, led by Luigi Di Maio, will win the highest percentage of votes. However, a right-wing coalition could be formed, made up of four parties, including former Prime Minister Silvio Berlusconi’s Forza Italia and the Lega Norda (Northern League), led by Matteo Salvini. Former Prime Minister Matteo Renzi’s Democratic Party is trailing behind. In a recent research note, TS Lombard said there is little point attempting to predict the makeup of Italy’s next government. The analyst team says a right-of-centre coalition is the only grouping with an outside chance of winning a working majority in both chambers.

The new electoral system 

Italy implemented a new electoral law in 2017, known as the Rosato Law. This means that voting will be counted with roughly one-third first past the post and two-thirds with proportional representation. Constantine Fraser, European political analyst at TS Lombard, says the new system means the election is difficult to predict. He says it is likely to yield a hung parliament and it is expected to benefit a coalition of right-wing parties.

Market nervousness ahead of the election

Investor nervousness has caused Italian-German 10-year bond spreads to widen in the run up to the election, driven both by selling in the BTP market and safe-haven buying in bunds. Fraser says BTPs are most vulnerable around Sunday’s vote. Anti-establishment, euro-skeptic gains in the vote will cause bigger short-term moves on Monday, he adds.