Three Potential Italian Election Scenarios And Likely Market Impact

The Italian elections are now just one week away and the latest polling results continue to highlight uncertainty around the event. Some polls suggest that the Eurosceptic Five Star Movement will win while most highlight the likelihood of a hung parliament, where no single party can achieve a majority. With a view to best gauging the market’s reaction in response to the outcome of the election, it’s important to consider the different scenarios we might see in the outcome of next week’s vote. Orbex explores three potential Italian Election scenarios and the likely impact on the market.

1 – Best scenario: Centre-left coalition

A situation where the current center-left government continues in power has become increasingly unlikely, given the extent to which the PD has lost favor in the polls. However, a continuation of the current government would be the most favorable outcome for Italy’s domestic economy. This is because the PD look to continue fiscal consolidation through enhancing public debt to 100% of GDP within ten years, alongside moderate efforts to push through labor market reform. This scenario would be the most encouraging for Italian investors and the eurozone alike as there would be no threat to eurozone stability which might be seen in the wake of the Five Star Movement winning.

2 – Base Case scenario: Grand coalition

The second of three Italian election Scenarios, which is the most likely at this stage given aggregate polling results, is for no party to win a majority but for an eventual coalition to be established between the PD and Forza Italia. Given the general disagreement between the two parties and the disparity between their policy agendas, a grand coalition would likely be weak. While fiscal expenditure would likely be increased at a moderate level the disagreement on matters such as the labor market and pension reforms would make this a very stifled government with little efficacy in policy initiatives. Although this scenario would clearly not be the most supportive for the domestic economy, the market reaction should be muted given the lack of threat posed to eurozone stability which will keep the ECB on course to normalize policy as outlined.