Italian election

By AMP Capital

Regular readers will know that when it comes to worrying about Europe, or more precisely the Eurozone, the thing we worry about most is Italy. By virtue of a highly fragmented political landscape, an undercapitalised banking sector, a weak economy and generalised political complacency about the country’s economic challenges, Italy remains the Eurozone’s weakest link.

A general election is scheduled for March 4th.  When we last wrote about the likely outcome (see the November issue of Quarterly Strategic Outlook) we observed the electorate was equally split between three blocs: the centre-left, the centre right and the Euro-sceptic Five Star Movement. Since then, the centre-right has gained momentum and looks best-placed to be the biggest bloc in the next parliament, though still well-short of a majority. Absent a surprise coalition deal (the right and the left?), a hung parliament seems the most likely outcome with the risk of further elections.

The good news is that despite its structural weaknesses and long-term challenges, the Italian economy has participated in the broader European cyclical recovery that occurred through 2017, though continues to lag the performance of more structurally sound economies.  

The recently improved economic backdrop has seen the anti-establishment, anti-Euro rhetoric recede somewhat. Even the Five Star Movement has backed off plans for a referendum on Italy’s membership of the common currency. Marine Le Pen’s poor showing in the final round of the French Presidential election probably had some influence too. The upshot is that, regardless of outcome and possible coalition permutations, a messy exit from the Eurozone is unlikely. 

That’s where the good news ends. Given the fragmented political landscape, the various parties are outdoing themselves with fiscal largesse and promises to wind back recent structural reforms.These promises include reversing recent labour market and pension reforms. 

On the fiscal front, former Prime Minister Silvio Berlusconi is promising a flat income tax and an increased minimum pension level. Another former Prime Minister Matteo Renzi wants to tear up the Fiscal Compact and increase the budget deficit. The Five Star Movement is promising a universal basic income. These will only serve to exacerbate the problems with Italy’s already fragile fiscal position and increase tensions with the Brussels and the European institutions.

In short, the risks of a new government taking Italy out of the Eurozone appears low, but at the same time so too does a stepping-up of much needed structural reform. Indeed, a reversal of prior reform seems more likely. Such an outcome will only serve to solidify Italy’s position as the weakest link in the Eurozone.

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Important notes

This blog post has been prepared to provide general information and does not constitute financial advice in accordance with the Financial Markets Conduct Act 2013. An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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