This is Why Italy’s Election is a Big Deal

Another vote, another split result.

This time it’s Italy.

The country´s election last Sunday delivered a stalemate.

The big winners: the two Euro-sceptic parties. That is, Luigi di Maio from the Five Star Movement and Matteo Salvini from Lega.

They left the parties of the two former Prime Ministers — Silvio Berlusconi from Forza Italia and Matteo Renzi from Partido Democrata — eating dust.

As you can see in the table below, the most voted party was the Five Star Movement with over 32% of the votes. That is a 7% increase from the past election.

Five Star Movement has been a long-time supporter of having a referendum on the Euro. In January, Di Maio changed his position saying he did not think it was ‘the right moment for Italy to leave the Euro. The referendum is a last resort which I hope to avoid.

Italy’s Election 07-03-2018

Source: The Guardian
[Click to enlarge]

How is Lega one of the big winners?

As you can see though, none of the four parties has majority.

But, how is Lega one of the big winners when it came in third on votes?

Well, the new Italian electoral law, Rosatellum Bis, rewards coalitions that achieve 40% of the votes.

If you look at the voting in terms of coalitions, the winner was the centre right, which teamed up Lega and Forza Italia together. They got 37.25% of the votes, followed by Five Star Movement with 32.36% (who ran alone) and the Left with 22.94%.

Berlusconi was the main figure of the centre right alliance during the campaign, while Salvini (from Lega) took a secondary place. Berlusconi already had him appointed as the Ministry of Interior if the coalition won.

The fact that Lega got more votes than Forza Italia in the individual tally has left Berlusconi on the side-lines. And brought Salvini forward if there is a future coalition government.

Lega has an anti-immigration agenda, an alliance with Marine Le Pen’s French National Front, and a want to lower taxes. They blame the euro for increasing poverty and have vowed to rectify the mistake Italy made by joining the single currency.

But again, none of the coalitions have the required 40% to govern.

As you can see below, the election divided the country. The rich north has voted for Lega while most of the rest of the country voted for the Five Star Movement.

Italy’s Election 07-03-2018

Source: The Guardian
[Click to enlarge]

And, much like Brexit, the collapse of the standard of living in the years after the global financial crisis explains this division…

It shows that voters want something different. According to Bloomberg, almost 90% of the population feels the country is on the wrong path.

In fact, the main topics in this election were growth, taxes and immigration.

Italy’s current economic crisis

Italy is the third largest economy in the EU, yet it is barely growing compared to other EU countries.

The GDP growth forecast for Italy for 2018 is 1.5%, much lower than the European average…and even lower than troubled Greece, at 2.5%.

Welfare is also a large concern. Italy has the second oldest population in the world after Japan. Almost 30% of its population is over 60.

Paying taxes is complicated, mainly due to bureaucracy. Five Star has promised lower taxes and a less complicated tax system. Lega wants a 15% flat tax.

And the other big concern was immigration. Italy is the port of entry to Europe and has had to cope with massive immigration. They feel they got very little help from the EU.

A stalemate now creates a lot of uncertainty for the country, at a time when they need actions.

Italy’s public debt is a whopping 132% of GDP.

Unemployment rate is at 11.2%, and youth unemployment at a high 31.5%.

Plus, there is still the issue of Italian banks and their non-performing loans (NPL).

Italy’s bad loans make up 25% of the European Union’s total according to the European Parliament.

Most of these NPLs date back to the global financial crisis in 2008. They are loans to medium and small sized businesses struggling to survive.

What’s more, the European Central Bank has been helping Italy’s recovery in recent years by buying Italy’s unwanted sovereign bonds. They have been doing this through their massive Quantitative Easing (QE) program.

That is, they have been getting cheap debt.

What to expect from Italy following the election

The possibility of a Euro-sceptic coalition could spell danger for cheap debt and the Italian banks.

As UBS analysts recently said in a research note:

In such cases, a potential increase in sovereign yields would impact banks via higher funding costs and the mark-to-market of government bond holdings.

What now?

Well, a hung parliament, with half of the votes going to Euro sceptics, is probably one of the worst-case scenarios for the European Union.

Since no coalition has a majority, parties will now need to negotiate if they want to avoid a new election.

So far, the Five Star Movement has claimed they will not join in coalition, as they claim they are anti-establishment. It will be interesting to see what they do.

But there is a very possible scenario of a euro-sceptic coalition…

And that’s why you should be watching Italy.

Will EU’s founding country start playing a more defiant role inside the European Union?

Kind regards,

Selva Freigedo,
Editor, Markets & Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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