Further political jitters emerged in Italy – UOB

Lee Sue Ann, Economist at UOB Group, gave her views on the recent political events in Italy, including the resignation of PM M.Conte on Tuesday.

Key Quotes

“Italy’s Prime Minister (PM) Giuseppe Conte resigned on Tuesday (20 August) evening. Conte told the Senate that the surprise move for the no-confidence vote against the coalition was forcing him to “interrupt” what he contended was a productive government. He also accused Deputy PM Matteo Salvini of showing “grave contempt for Parliament” and putting Italy at risk for a “dizzying spiral of political and financial instability” in the months ahead by creating an unnecessary crisis”.

So, what’s next?

“First, Mattarella can hold consultations to see whether any parties can form a majority. The Five Star Movement (M5S) and the Democratic Party (PD) could form a new government. However, since the two parties fall short of a majority in the Senate, they would require other left-wing parties to join in as well, making the coalition even less stable than it would be given their bad history”.

“Second, Mattarella can call for a fresh election and decide whether a technocratic and caretaker government should be put in place. These would likely see Salvini’s far-right Lega Nord (Lega) party and other right-wing parties forming a governing coalition, which could be up and running by mid-November”.

“Third, Mattarella could appoint an "institutional" government. In the event that negotiations for a German-style government contract between M5S and PD fail, Mattarella may ask the same majority to support an “institutional” government, which would be appointed by him”.

Finally…

“The next couple of weeks and, possibly, months will thus be crucial as far as Italy’s political situation is concerned. We expect to see some negative risk sentiment, mainly because the new government will have insufficient time to deal with the key 2020 budget proposal. On top of that, Italy has a sizeable structural deficit and heavily front-loaded debt maturity profile”.