Italy is back in the news again with the last minute attempt by populist parties “The League” and “The 5 Star Movement” to form a workable government.  It had looked as if co-operation was impossible and markets had resigned themselves to the possibility of more elections, or their favoured option of a non-elected technocratic government.  Not democratic and inherently unstable, so quite why this was deemed a good option was short-sighted. 

Instead, Italian bond and equity markets have suffered some volatility in recent days as the prospect increased of the two populist parties getting together to attempt to govern. There is little in common for the two parties who are united only in their desire to take power themselves and to stop the established parties from governing. Who is appointed Prime Minister and Finance Minister will be very important, as well as the policy agenda. Any signs of policy sense breaking out may be regarded very positively and isn’t entirely out of the question. There have been examples in the past of ‘populist’ governments reversing policy direction once in power on several occasions in Europe. Notably in Greece, where the Alexis Tsipras’s Syriza even held a referendum regarding austerity and then chose to ignore it and follow policies as specified by the EU, the ECB and the IMF. In Portugal, the current government (supported by the Communist party) were elected on an anti-austerity message but again has followed more orthodox fiscal policies once in power.

Developments in Italy will be keenly watched. If the populists prove to be reasonably sensible after all, the outlook could be quite positive and Italy can join the club of countries that enjoy an upgrade in credit ratings. To date it has been left behind whilst structural reform languished.

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