Italian Election Monitor: Edging closer to a Five Star-PD deal?

Danske Research Team Danske Bank A/S

Italian government talks are finally gathering some pace, after the inconclusive election result on 4 March and continuing political impasse (see Italian Election Monitor: Eurosceptic shift). As Senate leader Elisabetta Casellati has failed to broker a deal between the centre-right bloc (Forza Italia, League and Brothers of Italy) and the Five Star Movement (M5S) last week, President Sergio Mattarella has now given Lower House leader Roberto Fico (M5S) a mandate to ‘test the water' for a Five Star-PD coalition (see post-election timeline).

So far, developments have been more encouraging than expected, with party leaders of both PD and M5S yesterday saying that they are open to discussing a programme for such a government. Importantly, M5S leader Luigi Di Maio said his party has ended talks with the League after weeks of negotiations, a pre-condition set by the PD for starting talks with Five Star. This is important, as it reduces the probability of a eurosceptic M5S-League government, which would be the worst outcome from a market perspective . That said, we currently only attach a 40% probability to a Five Star-PD government emerging, due to the significant policy differences (see table next page) and inherent suspicion between the two parties following a hard-fought election campaign. Should talks succeed nevertheless, there is a fair chance that the programme would be relatively pro-European with a clear PD signature, given the PD's position as kingmaker and Five Star's weakened position after losing an important regional election last weekend (another to follow on Sunday). Both Five Star and the PD will now debate internally which stance to adopt. We do not expect any progress before next week.

Should the talks fail, a Eurosceptic coalition between M5S and the League remains a possibility, in our view, but it will depend on the League's willingness to abandon the centre-right alliance and become a junior partner under M5S. Alternatively, the president could try and broker a broad unity government between the major parties with a technocrat or consensus candidate as head, which would have a very narrow mandate to reform the voting system in H2 18 and take the country to new elections in H1 19 .

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Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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