What You Need to Know About Italy’s Upcoming Elections

Last Thursday, Italian President Sergio Mattarella dissolved parliament, starting the process for 2018 general elections (expected to be set for March 4, 2018).  Mattarella’s move was largely expected after parliament passed a 2018 budget on December 23, and while current Prime Minister Paolo Gentiloni of the Democratic Party (PD) will remain in charge until the election, many observers have started speculating about the next government—especially with three groups vying for power, including the anti-establishment Five Star Movement (M5S), which leads current polling. While investors have long feared M5S, in my view, the likeliest outcome appears to be gridlock—par for the course for Italian politics and unlikely to derail Italian stocks, let alone eurozone markets, in the longer term.

The looming specter of Italian elections stirred anxiety among market observers throughout 2016, largely due to M5S’s popularity. But entering the campaign, they aren’t running away with the contest. The center-left PD, led by previous PM Matteo Renzi, is in second place, with former PM Silvio Berlusconi’s center-right Forza Italia in third. (An added wrinkle: Forza Italia is likely to partner with the anti-EU, center-right Northern League.) The result is a tight three-way race.  

Exhibit 1: A Three-Way Race

Source: IXE.

While the horse race may spur hyperbolic headlines, M5S, the PD and the Forza Italia/Northern League coalition all claim about the same amount of support, making it unlikely one group pulls away. Moreover, recent changes to Italy’s electoral laws removed the automatic majority awarded to any party that managed to win at least 40% of the vote. Instead, about 40% of parliamentary seats will be chosen on a “first-past-the-post” basis (i.e., “winner takes all”) while proportional representation (via party list) decides the rest. Some variety of gridlocked government looks like the most likely outcome.

Plus, while folks fear a populist party like M5S sweeping into the government of a major eurozone economy, the party’s goals aren’t exactly clear besides being “antiestablishment.” They don’t boast an exemplary governing record in some limited, albeit high-profile, cases, and they have also moderated on some of their stronger anti-EU or eurozone stances. For instance M5S leaders have moderated the party’s prior pledges of holding an “Italexit” referendum should they take power—they now say the referendum was just a negotiating ploy and not one of their “real intentions.” Also, while Italy does tend to have stronger support for populist and anti-EU parties than other parts of Europe, they usually don’t cooperate with other parties or lack the support to have a meaningful impact on political policy.    

Overall, the upcoming Italian election sets up room for political uncertainty to fall further in the eurozone—a bullish tailwind. While uncertainty might climb immediately after the election (e.g., in the case of a hung parliament), the realization of the status quo—i.e., a weak government with little legislative power—should aid Italian stocks over the longer term.