This month’s Italian general election might seem another non-event from an investment standpoint, but it has long-term significance.
Silvio Berlusconi, perhaps Europe’s most prominent populist leader in the past two decades, is back to guide the right. The left is split as ever after former prime minister Matteo Renzi alienated many supporters due to his uncompromising ‘third-way’ politics. Far-right populist parties are on the rise, particularly the Northern League, which has dropped the first part of its name in an attempt to become a nationwide party. The Five Star Movement (M5S) promises to get a huge chunk of the vote but probably not enough to form a government on its own.
In short, nothing sounds terribly new, and given that markets have mostly shrugged off historic geopolitical events in the past two years, investors might see this as insignificant. But the campaign has been ugly, and the political environment feels markedly different from the last election in 2013. Almost all parties have made unlikely spending pledges, including reversing the 2011 public pension reform that saved Italy from default.
Immigration was one of the biggest issues of the campaign. Again, this is nothing new in current European politics. But with recent polls suggesting a majority for the right-wing parties, their leaders’ promise to deport 600,000 illegal immigrants warrants reflection. First, it is morally questionable. Secondly, it pretends to ignore Italy’s demographic and labour crisis. Thirdly, it is almost impossible to achieve. It would take unprecedented diplomatic skill to convince countries to take back citizens who have fled their homelands.
Most importantly, the plan threatens to open a rift with the European Union. A right-wing government could use the migrant crisis to demand leniency over EU budget rules, stoking tensions within the EU.
“The campaign has been ugly, and the political environment feels markedly different”
The EU has survived many difficult tests, and with an economic recovery that seems firmly on track, investors might disregard the prospect of a breakup. But while an actual breakup, or even a ‘Quitaly’ scenario, are unlikely in the short term, the EU project remains constantly under attack, and this does not bode well for the flow of capital within the continent.
There is no specific need to hedge portfolios against a negative market reaction to the election of a right wing Italian government. However, investors should always weigh the impact of tensions within the EU [on their investment strategy]. In this context, some consideration of the results of the election would be wise, if anything to build a map of long-term political developments in the continent.
Carlo Svaluto Moreolo, Senior Staff Writer