Chart of the week - Italian regional elections: attenzione!

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●  Heading to the polls: On the European continent, Italy remains the key political risk to watch. If the fragile coalition in Rome were to fall apart, markets may worry that new elections could sweep parties to power such as the Lega, which have occasionally toyed with Eurosceptic ideas in the past. This weekend, Italians will head to the polls. While a big majority looks set to approve a constitutional referendum to reduce the size of parliament by roughly a third, the real test for Prime Minister Giuseppe Conte’s year-old national coalition between the formerly anti-establishment 5-Star movement (M5S) and the traditional centre-left Partito Democratico (PD) will come in seven regional elections.

●  The right has made inroads over the past years: Since the general election in March 2018, the key opposition parties – the right-wing Lega, the far-right Fratelli d’Italia (FdI) and the centre-right Forza Italia (FI) – have snatched power from the PD in eight out of nine regional races. Voters have turned away in droves from the M5S – see chart. In addition the PD and M5S fielded a joint candidate only in one region whereas the parties of the right supported each other.

●  Another landslide for the right or a face-saving tie for the left? The right will probably keep Veneto and Liguria and win Marche comfortably. Judging by polls, the PD can count only on Campania. Among the more contested regions, Tuscany is the most highly prized target. The left has governed the wealthy province for the last 50 years. But the Lega has narrowed the gap to the PD in the polls. In Apulia the PD’s incumbent trailed the FdI’s candidate in August but has regained some ground recently. Losing Tuscany – and to a lesser extent Apulia – could throw the left into disarray. Conversely, a tie with three wins each for the right and the left could help stabilise the national coalition. The seventh regional election in tiny Valle d’Aosta is dominated by regional parties with less relevance for national politics.

●  Three details to watch beyond the overall result: 1) In Liguria, the PD-M5S are running on a joint ticket – a (likely) flop as in Umbria last year would make further alliances between the two (even) more elusive; 2) Another poor result would make the M5S (even) less predictable. 3) The FdI has risen from 10.5% to 15% in the polls in 2020 while the Lega has dropped from c32% to 26%. If the Lega fails to snatch victory in Tuscany while the FdI wins Apulia, Lega leader Matteo Salvini could come under pressure, especially if the party’s more moderate premier in Veneto does well.

●  The near-term political risks in Italy are sizeable – but they always are: The risks currently do not look any higher than usual. The PD and the M5S are disagreeing more openly again. For two reasons, we expect them to stick together nonetheless, even if this weekend goes badly for them: 1) The prospect of a victory of the right in possible snap elections remains the glue that binds them together. 2) Thanks to the EU’s €750bn recovery fund, Italy has c€100bn to distribute over the next couple of years. The two parties want to hand out the money rather than leave that pleasure to the right.

●  Medium-term outlook: Given Italy’s weak economic fundamentals, it will likely not return to pre-pandemic GDP levels until 2023 rather than 2022, like most of its European peers. If Europe uses the newly issued funds to put mild pressure on Italy, it may help to nudge the country to more ambitious structural reforms and a higher growth path. It is an opportunity, but the outcome is unclear. A coalition in Rome with renewed political capital – to come up with bold plans, and some longevity to start implementing them – would raise the chance that the opportunity could be used wisely.

Holger Schmieding

Chief Economist

+44 20 3207 7889

[email protected]

Kallum Pickering

Senior Economist

+44 20 3465 2672

[email protected]

Florian Hense

European Economist

+4420 3207 7859

[email protected]

Disclosures

This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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