By Mark Gilbert, Alan Crawford and Lorenzo Totaro
Italian voters have taken a step to the right, with the anti-euro Five Star Movement and the anti-migrant League parties capturing a surprising amount of support at the weekend elections.
The result should give pause to those who remain committed to the broader mission of forging closer ties among a coalition of the willing in Europe — and to anyone betting on closer integration as a reason to buy the euro. For Italian securities, it’s business as usual: Years of creaking coalition governments have vaccinated local markets against reacting too much to uncertain election outcomes.
The yield on Italy’s 10-year government bond was up only slightly. Italy’s main stock index was down after paring half of its initial losses. Traders and investors in Italian stocks and bonds are probably right to remain largely unbothered by the shambolic outcome. For the fixed- income crowd, the ECB is still acting as a buyer of first resort of the eurozone’s government bonds, at least until September. For equity holders, Italy’s domestic political travails look like a sideshow compared with the bigger issue of a looming trade war between the US and everyone it buys and sells with.
For the euro, though, the rise of populism in Italy threatens to undermine enthusiasm for the common currency, which turned positive in May 2017 when Emmanuel Macron was elected president of France promising to inject new life into the European project.
The European project had been bruised by the near-departure of Greece from the common currency project in recent years, and battered by the UK’s vote to leave the EU (though the latter decision is likely to diminish the UK economy more than it hurts the rest of the bloc).
Since Mr Macron’s ascendancy, the threat of Catalonia splitting Spain apart has diminished, while Greece’s rehabilitation as a functioning member of the euro has been largely accomplished. On the wider European political stage, the weekend vote confirming Angela Merkel’s fourth term as chancellor of Germany is another plus for Europe’s integrationists.
Whatever flavour of government emerges in Italy is unlikely to pose an existential threat to the common currency. However, the likelihood of progress on Europe-wide projects such as the much-needed capital markets union, the overhaul of agricultural policy or the thorny issue of managing migration inflows to the bloc is lower than it was.
Italy’s newfound enthusiasm for populist parties must surely be a worry for euro bulls. At first glance there’s little in common between the two main election winners, the upstart Five Star Movement of Luigi di Maio and Matteo Salvini’s right-wing League. However, both tapped into widespread resentment at Europe and the government’s inability to shelter Italy from the front line of Mediterranean migration.
The anti-establishment Five Star Movement was on track to be the biggest single party while a centre-right coalition led by the anti-migrant League will be the largest group overall. Neither leader has a majority. Both claimed to have a mandate.
“The centre-right is the coalition that won, it’s the coalition that can govern,” the League’s Salvini said in a televised press conference from Milan. Less than two hours later, Mr di Maio said it is Five Star that has the right to lead and Mr Salvini doesn’t have the votes. After establishment parties managed to contain populists in German, French and Dutch elections over the past year, their defences were overwhelmed in Italy as voters rebelled against two decades of lacklustre economic growth and a surge in immigration.
In his news conference, Mr Salvini repeated his dire predictions for the euro and thanked French nationalist Marine Le Pen for her support. He said Ms Le Pen would have been a great president for her country if she had won last year’s election.
“The common currency system is bound to come to an end,” Mr Salvini, 44, said. “Not because Salvini wants that but because that’s what facts, good sense and the real economy say. So, we want to be prepared when the moment comes,” he said.
Mr Di Maio, 31, by contrast, presented himself as a serious figure ready to take on the burden of government. “We feel the responsibility to give this country a government,”’ he said. “We say this above all to investors: we feel this responsibility.” It’s now up to Italy’s president to map a way forward.
As Rome faces uncertainty, Berlin saw the clouds lift on a five-month deadlock after an election that catapulted the far right into the Bundestag for the first time since the 1950s. Ms Merkel now has her grand coalition, but it will be harried by the Alternative for Germany, which calls the chancellor a traitor for her open borders stance.
The Italian election result and Germany’s move toward a coalition kick off a busy week for macro events. The Bank of Japan and ECB will meet to decide on interest rate policy.