Italy’s fragile coalition government fell apart sparking a sell-off in equities around the globe. Investors fear the turmoil in the eurozone’s third largest economy threatens the future of the euro. Italy’s coalition government collapsed due to Italy’s president, Sergio Mattarella, a Europhile, rejecting the appointment of Paolo Savona, a Eurosceptic, as finance minister.
Paolo Savona was nominated by the coalition government’s Five Star Movement party which has become the dominant political party in Italy over the course of the last nine years. The Five Star Movement is neither a traditional conservative or liberal political party. It is anti-establishment, Eurosceptic, anti-immigration, and pro-green. The “Five Stars” refers to its five main ideological issues: publicly owned water, sustainable (eco-friendly) transport, sustainable development, right to internet access, and environmentalism.
The Five Star Movement was formed in 2009 by comedian Beppe Grillo. Its popularity led the Movement to moderate its stance on some issues and install a new leader, 31-year-old Luigi DiMaio. While the Five Star Movement won 222 out of 630 seats in Italy’s lower house during March’s election, it fell well short of being able to form a government on its own. To overcome this problem, the Movement formed a coalition government with the Northern League. This coalition put together a program of government which removed some of the more extreme policies of both parties. However, President Mattarella rejected the coalition’s nominee for finance minister who had described the euro as a “German Cage” and had written that “Germany didn’t change its idea on its role in Europe after the end of Nazism even if it abandoned the idea of imposing itself militarily.”
This rejection caused outrage within the coalition and left President Mattarella with two choices: call for another election or attempt to appoint his own finance minister. Mattarella chose the second option, which paves the way for new elections this autumn.
With no foreseeable path to a working government, Italy’s political situation is in turmoil. The real cause for concern is the potential for the anti-establishment parties to gain more control and destabilize the euro. Recently, the Five Star Movement and the League have played down the idea of leaving the eurozone, but in the past they have advocated a departure. Regardless, their current policies on immigration and economics puts them at odds with other EU governments and could eventually lead to a referendum on Italy’s membership in the euro. At this point, another eurozone crisis has not emerged, but if the situation deteriorates, it could lead to a loss of confidence in the sustainability of the euro.
For now, the near-term stress on the markets should not be enough to derail the European economic recovery; however, the upcoming elections will have to be monitored closely to see if the next government pushes for “Italexit.”
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Rick Cloutier, PhD, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his BS from URI, MBA from Boston University and PhD from SMC University.