Sunday’s (March 4) Italian election appears to have resulted in a hung parliament as widely expected. However, centrist parties lost ground and populist parties made more gains than polls had generally predicted. The left-wing Five Star Movement was the biggest single party with around a third of the overall vote, but a centre-right bloc featuring the anti-immigration Lega party gained the most seats.
Attention will now turn to who can form a coalition, but it seems likely the Five Star Movement will have a major part to play in Italian policy going forward. It is not clear, however, that they will form part of the government. The key common plank of policies for various parties who will now try to form a government is an end to fiscal austerity and more freedom within the European Growth and Stability Pact. Italy’s economy is currently seeing a cyclical recovery, but with unemployment still high there is, arguably, room for more fiscal stimulus. Italy’s high government debt, however, does constrain the extent to which fiscal stimulus could be deployed. Coalition governments are commonplace in Italy and a single party has not won an outright majority since the Second World War. That said, with around 50% of the voters backing Eurosceptic parties, this result is a warning shot for the EU.
On Monday morning (March 5) the Italian 10-year government moved up three basis points (bps), but any movement will be limited by the European Central Bank’s (ECB’s) continued quantitative easing programme in the short-term.