abrdn: Commentary on the Italian elections

abrdn: Commentary on the Italian elections

September 26, 2022

Italy Politics
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Pietro Baffico, Economist at abrdn, comments on the results of the elections in Italy.

Elections in Italy gave way to a comfortable majority for the right-wing coalition in both the upper and lower houses, in line with polls and our expectations. The results increase the downside risks for Italy’s outlook should the new government collide with EU’s institutions.

The election was characterized by a record high abstention rate, with participation around only 64%. This story is not new, voters have been increasingly disengaged across Europe, leaving gains to far-right and populist parties over the past year amid a cost-of-living crisis, and with an enraging war in Ukraine.

The leader of FdI Giorgia Meloni, who is set to become Italy’s first female PM, has over time moderated far-right and Eurosceptic rhetoric, suggesting less confrontation with European institutions. In an attempt to portray the coalition as a safe pair of hands, Meloni insisted she will be prudent with public spending, and would consider the appointment of moderate ministers in key cabinet roles. She also struck a sober tone after the result, acknowledging the serious economic challenges ahead.

For investors, such a moderation may help to limit the initial degree of market response to the election results, especially given that the large and sustained polling lead has given the market plenty of time to price the election outcome.

But while the coalition parties have significantly softened their Eurosceptic stances over time, much will depend on their plan to ease fiscal discipline, and partly revise the reform agenda already agreed under Draghi’s government. Their first test will be the fiscal budget, to be approved on a tight schedule in the fall.

Tension between the new government and the EU institutions is therefore a risk, which could jeopardise the disbursement of EU funds, add downside risks for Italy’s outlook, and constrain the ECB’s ability to contain sovereign spreads.

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