The Italian election arguably comes at the best possible time for the country, as it has a real chance to enact some major reforms that would help it back on the path of economic growth.

 

Published ahead of election day, our report explains what the challenges facing the Italian economy are, why this election is important and what potential financial market reactions we may see.

 

“Average Italians still earn less than two decades ago. On current IMF projections, it could take nearly a decade for wages to return to their 2007 levels."

 

We argue that the labour market, public finances and non-performing bank loans represent the three most pressing issues to be resolved by the new government that will be elected on March 4. The new election system makes the result harder to predict than usual. Various quite different scenarios are possible, ranging from left-of-the-centre to right-of-the-centre coalitions, including a hung parliament.

 

“The main risk from the election for Italian government bonds (BTPs) is mostly of a fiscal nature. Indeed, we think that fiscal matters will be the main concern for financial markets in the medium term."

 

The currency market, on the other hand, seems to have lost interest in eurozone politics. Unlike in France, when the EUR exchanged rate echoed the changes of the opinion polls, Italian polls haven’t had an influence yet. We believe that the Italian election is very unlikely to bring back politics as the dominant driver, since none of the likely election outcome point to a meaningful threat of Italy leaving the euro.

 

Executive summary from CIO Insights Special ‘The Italian elections – Possible outcomes and their implications’, published February 2018.