Italy is the latest country facing choppy waters amid the rising tide of nationalism and protectionism. Yet the financial markets remain strangely numb to the news that a coalition government between two populist, anti-EU parties in the EU zone’s third-largest economy is becoming increasingly likely.
An inconclusive election result in March left the country without clear leadership. Attempts to temper the extreme views of the anti-establishment Five Star Movement and the far-right League (which together took over 50% of the vote) with coalition deals involving more centrist parties have fallen through this week.
Luigi Di Maio of Five Star and Matteo Salvini of the League have announced that they are close to an agreement under an extended deadline that will give them until this Sunday to hammer out the details of the deal. If these talks fail, Italy could be heading back to the polls for another election.
Both parties ran on anti-establishment platforms and drummed up support through criticising Italy’s relationship with the rest of the European Union and strong anti-euro rhetoric. The League remains outspoken on the need for an Italian exit from the currency as soon as feasibly possible.
The parties may find it hard to scratch out specifics in the common, Eurosceptic ground they share, however. While Five Star wants to introduce sweeping welfare payments to tackle economic inequality and hardship, the League is more concerned with slashing taxes. Both parties hold broadly hostile views towards immigration and appeal to the nationalist sentiment that’s gathering force across Europe.
The decisive defeat of France’s own far-right party, Front National, in the May 2017 elections was comforting to many after the shock results of the UK Brexit referendum and the US election in 2016. This has not, however, dampened the passionate and increasingly mainstream support seen across the world for previously fringe parties promising to put their countries first.
It’s surprising then that the news of Italy’s fall to populist politics has not been greeted by the same degree of market volatility as we saw with the US and the UK. After the UK voted to leave the EU, the pound dropped to its lowest levels against the dollar for thirty years.
Italy’s 10-year bond yield edged a little higher as the news broke, while Italian bank shares have stayed stable throughout the nine-week stalemate prior to this impending deal. It may be that investors are not yet reacting to the potential fallout from this coalition and that volatility will increase once more is known about the shape of things to come.