Italian Elections Result in Surge of Populist, Far Right Parties

By: AGF Investments • March 5, 2018

Italians headed to the polls on Sunday, March 4 for national elections, the first since 2013, together with regional elections in Lombardy and Lazio. Participation was high at 74%. Voters elected the new members of the Chamber of Deputies (630 seats) and the Senate (320 seats) under the new electoral law (“Rosatellum”), which implies that two-thirds of seats have been allocated by a pure proportional system and by a “first-past-the-post” majority system. Thus, official seats have not yet been determined. Nonetheless, both houses are essentially equally powerful, with approval required from both to form a new government. Under the new law, if no party or coalition reaches a majority, it is up to President Sergio Mattarella to decide which party or coalition will be given the chance to form a government following the election.

The results of the election show that no major party or coalition will win an absolute majority (40%), leading to a hung parliament as voters rushed to anti-establishment and far-right groups in record numbers in favour of the “protest vote” (Figures 1-2). The stronger-than-expected rise of the anti-establishment Five Star Movement (M5S), led by 31-year old Luigi Di Maio, emerged as the largest single party, while the incumbent Democratic Party (PD), led by prime minster Matteo Renzi, and former Prime Minister Silvio Berlusconi’s centre-right party Forza Italia suffered the largest setback. The right-wing populist Northern League also did better than expected. The two populist parties now garner 50% of the vote, which is unprecedented in Europe where the populist vote had been rising across Europe for several years but had not captured nearly half the vote. This occurred despite the fact that the Italian economy has performed strongly.

Potential Alliances, Risks and Implications

An M5S-centre left government seems to be the most probable scenario for now, though an intense political agenda and a potentially long period is likely to follow in order to forge new alliances with enough votes to support a stable government. M5S with the support from the Northern League or the centre-right with some support from the centre-left are other potential scenarios.  If it is impossible to form a government new elections will probably be held in the early summer or early fall. Based on historical experience, however, if a new government is formed it will not last much longer than a year.

Despite the rise of the anti-establishment and far-right parties, however, there still appears to be a low probability of an Italian exit (or ‘Italexit’) from the EU. In fact, even if there was strong intent to exit, the chance is quite low given the legal and constitutional barriers that must be overcome. Still, the mere possibility of an Italian government with such goals would be unnerving to markets, as experienced last year. Perhaps the bigger risk is an extended “stalemate” that leads to no political change and the lack of desperately needed economic reforms. Additionally, tensions between Italy and its European partners may increase as the latter may be less enamored by the newly forged alliances. This could result in Italy’s partners demanding risk reduction at the national level before further steps towards integration and risk sharing can be made across the EU.

Another potential concern are the fiscal policies of M5S and other parties that they may forge alliances with. For example, M5S and the centre-right are both in favour of sharp fiscal easing, though have suggested their intent to reduce government debt to GDP, while M5S has stated they want to keep a 3% fiscal target and reduce government debt to GDP by 40% over the next 10 years. Fortunately, the EU Commission has had a poor historical track record of enforcing its Growth and Stability Pact, which requires countries cannot run fiscal deficits of more than 3% of GDP unless undergoing significant structural reform. Also problematic is the centre-right’s plan, which includes the introduction of a flat tax of 23% for households and corporations, among other changes, with a total cost of approximately €104-130 billion, or 7-8% of GDP.

Economic Woes Have Contributed to Discontent in Italy

While an exit from the euro is not a viable option for Italy, dire economic conditions in the country will likely invoke continued attempts, or at least thoughts, by the electorate to do so. While the present cyclical economic upswing could allay short-term fears, frustration around Italy’s economic performance is not new as the country has experienced two decades of dismal economic conditions. This can be best viewed through Italy’s real personal disposable income (PDI) during the period 1998-2017 (Figure 5). Italians have experienced a decline in income since the euro was launched – a significant outlier relative to other European countries. The country has also lost competitiveness since the euro was launched (Figure 6).

What's Next?

We expect continued uncertainty and increased volatility in Italy as talks of a new coalition is formed. By March 23rd, the new Parliament will need to hold its first meeting and appoint the Presidents of the two chambers. If no clear position with respect to the next ruling emerges, the elections of the Presidents will be important to test the willingness of parties to cooperate. Following this, there will be a consultation phase led by the President of the Republic, Sergio Mattarella. This will be closely watched as the President will have the delicate role of assigning the mandate to form a government to the party/coalition more likely to have identified a ruling majority.

The next government will consist of a mixture of parties that will likely need to moderate in order to mutually coexist within a ruling coalition. In the meantime, the muddle-through politics in this environment is likely the less risky option. Over the medium-term, the flare-up of Eurosceptic parties have resulted in capturing more than 50% of the vote. This could hinder the chances of Rome agreeing to any new Franco-German institutional initiative on completing monetary union.

The commentaries contained herein are provided as a general source of information based on information available as of March 5, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein.

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Publication date: March 5, 2018