European markets have clearly shown anxiety about the joint reform programme presented by the two parties that have agreed to form a coalition government in Italy. In the March general election, Italians showed their desire for change, giving their overwhelming support to the Five-Star Movement, founded in 2009 by comedian Beppe Grillo, and the Lega, a regionalist party. However, the parties had to form an alliance as neither had enough seats to govern on its own. 

The two parties have come up with a set of reforms that could put Italy on a collision course with other EU countries. They come from different political traditions but broadly agree on a set of principles, including protection of labour (through trade barriers if need be), lowering taxes across the board and gaining greater independence within the EU. 

They have been branded as populist and have presented a programme that presents pension reform as one of their key goals. The new government will attempt to ease the rules for retirement and raise spending on pensions, while trying to redraw EU treaties in the country’s favour. 

Italy faces an uphill struggle to free itself from the real or perceived shackles of EU rules without losing the confidence that investors and businesses have bestowed upon it in recent years. 

Significant fiscal slippage would undermine the country’s fragile debt position and derail the government’s efforts to restore growth by stimulating internal demand, unless its plan to introduce a low flat tax rate proves successful.

Investors – and fellow Europeans in general – would be excused for feeling nervous, but they should not yet worry too greatly about the future government. It will put Italy’s membership of the EU under pressure and while it raises the risk of ‘Quitaly’, the likelihood of this happening is low. 

The more likely scenarios include the possibility that the coalition will fall apart before too long, owing to the Lega’s strong links to former prime minister Silvio Berlusconi, a committed supporter of the EU. But even if it holds together, it might not achieve nearly as much as it is planning to and essentially preserve the existing order. 

In any event, the government would have to call a popular referendum on Quitaly, if it decided to go that far. It sounds like an ominous prospect but it does not mean Italy would automatically exit the EU. 

Investors will have time to ponder the activity of the new government. Meanwhile, Italy still offers short and longer-term investment opportunities despite the uncertain economic outlook. Investors would do well to focus on long-term economic trends rather than trying to second guess national politics.

Carlo Svaluto Moreolo, Senior Staff Writer