Italian election: Why the stakes are high

Research

Article by: Nordea Markets

Prospects for a stable government after the 4 March election appear remote.

Italians head to the polls on 4 March in an election hugely important for Italy and the Euro area. Italy needs reforms to lift growth and solve its looming public debt issue. Europe needs a stable, cooperative Italy that wants to remain in the Euro area. Neither will get what it needs, which could create problems a few years down the road, says Nordea Markets chief analyst Jan von Gerich.

The vote will determine the 630 members of Italy’s Chamber of Deputies (lower house) and the 315 elective members of the Senate (upper house).

The stakes are high, but according to the latest polls, building a stable government will be extremely difficult. Unstable governments have been regrettably common in Italy.

Anti-euro sentiment weakened, but Europe should still care

Fears that the election would turn into a clash between pro- and anti-euro parties have largely dissipated. Most of the euro-negative voices have quieted, which should also limit the worst fears in financial markets. Yet most parties are unlikely to support steps for tighter integration, which will hamper the evolution of the Euro area. And all of the main parties want more room on the fiscal side, which risks another clash with the EU.

Election-related uncertainty has already had an impact in markets, standing in the way of higher core government bond yields and a stronger euro in the coming weeks ahead of the vote.

5 Main Takeaways

  1.  

    Fears about Italy’s exit from the Euro area are largely unwarranted for now.

     

  2.  

    An unstable government or inability to form a government is the most likely outcome.

  3.  

    Anti-euro comments have weakened, limiting the worst fears in financial markets.

  4.  

    The election is still a factor standing in the way of higher core government bond yields and a stronger euro in the coming weeks into the election.

  5.  

    Italy’s structural challenges to remain unresolved

For the full analysis, visit Research on e-Markets.

And don’t miss the pre-election podcast with chief analysts Jan von Gerich and Anders Svendsen.

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