Italy’s rebel alliance to restore the republic? (Part two)

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Italy’s rebel alliance to restore the republic? (Part two)

Two weeks ago, we provided an update on the Italian elections. At that time the two populist parties, the League and the Five Star Movement, were forming a coalition.

Matteo Salvini and Luigi Di Maio, leaders of the League and the Five Star Movement, nominated their candidate to be finance minister. However, their choice received a big (emperor) thumbs down from Sergio Mattarella, the Italian President. The person nominated is Paolo Savona, an 81-year-old Eurosceptic economist. Savona is a man who has made his feelings clear on the Euro, stating in 2015 that Rome should create a “plan B” to exit the Eurozone.

The ability of the Italian President to exercise veto powers is vested through the post-war constitution but his decision to use those powers is proving highly controversial. He has reasoned that Mr Savona’s policy objectives pose a threat to the savings of Italian citizens.

As we go to print a new deal has emerged. The coaltion is now able to form a government but with a new finance minister Giovanni Tria, an economics professor who has not advocated leaving the EU.

The graph below shows the yield on the Italian 2-year bond, most commonly used as an indicator of political risk. The rejection of Mr Savona was certainly felt in financial markets as yields rose 2.4% over a four-day period. After Sergio Mattarella’s late efforts to stop the coalition from collapsing through to the eventual appointment of Giovanni Tria, investors’ perceptions have changed shown by the 2.0% drop in yields.

Italian Government 2-year Bond Yield

Source: Bloomberg, 31 May 2018
The alliance between the right-wing League movement and the populist Five Star party is something that will continue to court controversy and encounter the full force of European Union coercion. The EU’s initial attempts to influence proceedings in Italy have been clumsy, meeting fierce resistance. What is clear in all of this is that we are only at the beginning of what will undoubtedly become a fascinating tug of war between Brussels, with its vision of an extended, integrated Europe, and Rome, with a much more nationalistic agenda. For Italy’s coalition government’s agenda to be fulfilled, it requires more spending, more borrowing and greater EU assistance with Italy’s migration problems.

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