June 01, 2018

Italy forced into Europe’s and stock market’s corner.

Management comment

Italy had backed itself up into a corner with regard to Europe and the markets.

President Mattarella therefore had initially refused to approve a government with its cornerstone (Finance Minister) proving too incompatible with the eurozone system (and even its existence). Two months after the election results, Italy had still not established a government (which is not really a problem for managing current affairs) and the cost of financing its economic agents (state, local authorities, banks, companies, consumers) increased sharply (+150 basis points on Italian 2-year yields). This last point should be viewed in perspective, as Italy is not in the same economic situation as in 2011-2013. The recovery has been confirmed and Italian banks’ balance sheets have been partially streamlined.

As these lines are being written, discussions held between the two leading parties at the election have led to an agreement on a balanced government, nominating a more euro-compatible minister for the economy. Given current opinion polls, another round of elections would not necessarily have produced results any more easily politically or economically transcribed (Lega in a position of strength) unless this party had formed an alliance with another such as Forza Italia and diluted its anti-euro programme. Furthermore, President Mattarella probably would not have had the chance to refuse a new prime minister coming from a broader majority supporting the ideas of the Lega (immigration, tax cuts...).

History also reminds us that in France, under the Third Republic in 1879, the president at the time, General de Mac Mahon, used the same method (authorised by the constitution) to finally resign afterwards due to the strength of the opposing popular vote which imposed an institutional and technocratic decision. The establishment of a new government in Italy will surely appeal to investors in the short term. The coalition, however, will be no less imbalanced.

Spain may also change government following a vote of no confidence in parliament. If we add the chronic difficulties facing emerging economies (Argentina, Turkey and Brazil), the Trump administration’s protectionist threats backed by the supremacy of the dollar and the overall cost of the oil bill for the world’s economy, it is legitimate to wonder whether or not there will be a possible general slowdown in global growth.

Europe, potentially bogged down by another sovereign and financial crisis (stemming from Italy or even Spain), might once again be...the biggest loser. Political decision-makers have now been warned of the risks.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in June 1st, 2018.

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Italy had backed itself up into a corner with regard to Europe and the markets. President Mattarella therefore had initially refused to approve a government with its cornerstone (Finance Minister) proving too incompatible with the eurozone system (and even its existence). Two months after the election results, Italy had still not established a...
2018-06-01