Citywire for Financial Professionals
Stay connected:

View the article online at

Will the Italian election pose a risk to the eurozone?

The Italian election result could have profound repercussions for the eurozone and its currency, fund managers have warned.

Will the Italian election pose a risk to the eurozone?

Italians will take to the polls this Sunday for what is being touted as the most important election in Europe this year.

This is because the outcome could pose risks to Italy's economic recovery and the future of the eurozone. There is a possibility that the election could see the ruling centre-left Democratic Party lose power to a centre-right coalition, led by former prime Silvio Berlusconi. His party, Forza Italia, has the potential to form a coalition with two far-right anti-Europe parties - Northern League and Brothers of Italy.

With all major political parties proposing fiscal expansion, Edward Park, investment director at wealth manager Brooks Macdonald, said it was unclear how this would be financed. The upshot would be a higher budget deficit. 

‘The Italian state already has a public debt to GDP of 130%, so fiscal expansion is unlikely to be palatable to Brussels,’ he said.

‘Should a Northern League-led coalition or messy grand coalition lead the polls on Sunday, it is likely that the market focus will return, yet again, to the Italian deficit.’

This creates the potential for Italian risk assets to come under pressure, as well as contagion into the wider eurozone markets and the euro.

In particular, Italian banks could come under pressure because they have exposure to Italian sovereign debt as well as the broader economy, Park said.

Coalition combinations

Even if Forza Italia joins forces with the Northern League and Brothers of Italy, they still stop short of a working majority at 40%, David Zahn (pictured), head of European fixed income at Franklin Templeton, pointed out. This would mean inviting either Five Stars Movement, another far-right party, or the Democratic Party to make up the numbers.

If a centre-right coalition is able to secure a majority government, Zahn anticipates that markets will be spooked. This is because the centre-right intends to increase fiscal spending against Brussel’s wishes and to devolve powers. However, they have stopped short of calling for an exit from the European Union.

‘If the centre-right do secure a government, we are likely to see an increase in government spending and this could be potentially negative for Italian bonds and we may see a sell-off,’ said Zahn.

Mike Buhl-Nielsen, manager of the Jupiter Europa fund, does not expect to see a centre-right majority coalition coming to power next week. Instead, he points to the possibility of a ‘grand coalition’ of parties - something that would represent the best possible investment outcome.

The bond market is sensitive to political risk, so he views the ‘relatively benign spread environment’ as a sign that the market is not concerned about the far-right party gaining power in Italy.

Although a coalition that includes Northern League or Brothers of Italy would shock investors, Buhl-Nielsen notes that a lot of uncertainty is currently priced in to Italian equities.

‘Any discount that may currently be applied to Italian shares relative to the rest of Europe could well be eliminated once the uncertainty in Italy recedes, and people remember that other areas of the world have their fair share of uncertainty too,’ he said.

Short-term moves

Serge Pepin, European equities investment specialist at BMO Global Asset Management, suspects that any turbulence in the Italian stock market could prove to be short-lived. This was the case for the UK's shock vote in favour of leaving the European Union and Donald Trump’s US election victory.

‘Investors will usually turn their attention to corporate earnings and fundamentals,’ he said. ‘We do not believe that Italy’s premier stock index will act any differently.’

Like Buhl-Nielsen, Pepin pointed to what is currently being priced in to bond markets.

‘The gap between Italian and German bond yields, a gauge of how investors view relative risk, has fallen to around 1% form a high of 1.83% in April 2017,’ he said.

‘It appears that investors in general feel relatively comfortable holding Italian assets in the run-up to the national election.’

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire Guide to Investment Trusts

In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

Watch Now

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add to your safe senders list so we don't get junked.

Sorry, this link is not
quite ready yet