Changing EuropeEurozoneItalyPolitics

Italy: between euroscepticism and debt burden

The Northern League and the 5 Star Movement appear to have reached a broad agreement on the policy priorities for the coming term. The proposal still needs to be finalised and approved by the President Sergio Mattarella, in addition the two parties are still negotiating on the name of the future Prime Minister and the cabinet allocation. According to the documents published by La Repubblica overnight, the coalition has agreed to boost investment, simplify and reduce the tax burden and introduce various changes to the judicial system, the education system and strengthen public healthcare. There is also a commitment to boost the resources for maternity support.

On the thorny question of the EU(ro), as we expected the coalition does not commit to a referendum on the euro, rather it pledges to cooperate with European partners to change the EU, in particular to reduce the responsibilities of the EU, reform the CAP and enforce migrants quotas. We maintain the view that whilst the incoming government may materially influence the growth potential and competitiveness of the economy in the next 3-5 yrs, the changes in the first year of term are likely to be minor, constrained by a necessary learning curve typical of the first phase of government, the strong monitoring internally and at the EU level and given the slow reform process of the Italian institutional system.

That being said, noise surrounding the policy implementation will be higher than in the recent past. We stress that given the global backdrop, the Italian recovery remains “solid” (for Italy’s standards growth above 1% is not bad) and our model for the 10 yr bond yields signals that current market valuations are close to fair value given the inflation outlook and fiscal prospects.