By Jeffrey Smith
Investing.com – The European institution may not enjoy the prospect much but Italian financial markets welcomed the apparent electoral victory of the right-wing Giorgia Meloni alliance at the weekend.
Analysts said the outcome would give the country a chance to form a stable government for a full five years – a rarity in Italian politics – while Meloni’s subtle pre-election messages suggest it will not rush into a direct confrontation with the rest of the eurozone over its economic and budgetary policies.
However, the country’s huge national debt, low growth rate, and increasingly precarious background to the global market leave Meloni and her relatively inexperienced team little room for error.
ING Economist Paolo Pizzoli described the outcome as “moderate” to Italian assets: “enough votes for the right-wing coalition to ensure stability but not so much that it can change the constitution by a two-thirds majority.”
The stock market, up 1.3% on Monday, the best-performing market in Europe, agreed, hoping Meloni would deliver on a promised cut in corporate income tax. Bond markets were less convinced, on a day overshadowed by much greater volatility in British markets. The benchmark yield rose 12 basis points to 4.48%, but its poor performance against other eurozone debt was no exception: the “spread” over its counterpart widened by 7 basis points.
The winning bloc’s composition was widely seen as an added benefit, given the disappointingly poor performance of Matteo Salvini’s Liga party. Salvini has historically been a more disconcerting presence in Italy’s international relations, courting Russian President Vladimir Putin and flirting with a rejection of the euro. However, Lega only polled less than 9%, down from more than 17% four years ago.
This weakness makes it unlikely that Lega will be able to claim the highly influential Treasury position in the new government, an appointment that is likely to say much about both the tone and course of the Meloni government’s policy.
Whoever you choose for the position of Minister of Finance will be dispensed with his or her work. With interest rates at a nine-year high this summer and still rising rapidly, the cost of servicing Italy’s 2.77 trillion euro mountain of debt is likely to crowd out other public spending that could be used to maintain living standards.
โMarkets are still in the discovery stage, ready to test the new government, especially in the current volatile environment.โ Analysts at Algebris said. “The appointment of the Ministry of Finance and the next budget will be the first key to watch.”
Meloni didn’t make things easy on herself by making expensive pre-election promises. Nicola Nobile, an analyst at Oxford Economics, said before the survey that if the bloc’s promises were fully implemented, it would push the budget deficit to 6% of GDP by 2027, triggering a “severe market reaction to Italian bond yields.”
However, he noted, “Our basic view remains that the coalition’s electoral promises are likely to be watered down or abandoned in the governance process. There are strong incentives, such as the need for European Central Bank support, for the incoming government to maintain a wiser approach.”
ECB assistance has been essential in maintaining the Italian bond market order this year with global inflation rising. It is currently throwing the money it gets from Italian BTPs while German and Dutch bonds mature into its quantitative easing portfolio: this is gradually but constantly weakening the ECB’s principle of treating all members of the currency union equally.
Moreover, the ECB has given itself the ability to skew its policy support further in Italy’s favor with a new instrument known as the Transfer Protection Instrument – albeit that will depend on Rome following eurozone rules on fiscal and economic policy. Meloni inherited a budget package from Mario Draghi that was approved by the European Union but will need to change it if she is to avoid reneging on many of her election promises. For now, analysts are betting that the changes you’re pushing for won’t break deals.
โMelone has not much to gain but much to lose from courting conflict with the EU,โ Berenberg chief economist Holger Schmieding said in a note to clients, referring to โฌ192 billion in aid earmarked for Italy from the โnext generation of the EU.โ โPandemic recovery program, and the prospect of continued ECB support in exchange for good behaviour.
