HOW IS THE POLITICAL SITUATION UNFOLDING IN ITALY?

Nearly three months after the general elections held on 4 March, which produced an extremely fragmented parliament, a government has just been appointed in Italy, following two weeks of twists and turns. The “Government of Change” formed by the League and the Five Star Movement will be headed by Giuseppe Conte, a law professor close to the Five Star Movement, and has 16 ministers. The leaders of the League, Matteo Salvini, and of the Five Star Movement, Luigi Di Maio, will both be deputy prime ministers and they will take over respectively as interior minister and minister of economic development and labour. Giovanni Tria, an economist and chairman of the Italian National School of Administration, has been appointed minister of the economy. Paolo Savona, who wants Italy to leave the eurozone, is minister for European affairs. Enzo Moavero-Milanesi, who served as minister under Mario Monti and Enrico Letta, takes over as foreign affairs minister. 

WHY DID THIS PERIOD OF POLITICAL UNCERTAINTY HAVE SUCH A BIG IMPACT ON THE FINANCIAL MARKETS?

The initial version of the agreement for a Government of Change included policies that clearly questioned Italy’s membership of the eurozone, such as a return to pre Maastricht rules and the cancellation of part of the debt held by the ECB. This triggered a wave of mistrust on the markets and widened Italy’s spreads. The fi nal version of the agreement does not include these proposals and instead focuses on the two parties’ main promises: the basic universal income (Five Star Movement) and the fl at tax for households and businesses (League). However, the choice of Paolo Savona to implement these reforms in the fi rst version of the Government of Change was seen as a show of force to the European authorities regarding budget matters. The crisis reached a pinnacle on Tuesday 29 May when the fi rst attempt at forming a government was rejected, leading to the risk of a return to the polls. New elections would have strengthened the two anti-system parties and could well have turned into a referendum on whether Italy should stay in the eurozone. Sovereign risk spread to the Italian banking sector. The markets reacted even more violently because none of the eurozone’s stabilisation mechanisms set up to help countries in diffi culty could have been used to resolve an Italian crisis. Italy risked no longer being eligible for the ECB’s QE asset purchases if its sovereign rating was downgraded to the high yield category. Access to the emergency OMT (Outright Monetary Transactions) programme is subject to the implementation of adjustments and austerity measures, which goes against the new government’s policy beliefs.

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