Summary:

• The Italian general elections will take place on the 4th of March

• According to polls no party will be able to secure the governing majority

• Silvio Berlusconi’s centre-right coalition is expected to win the most votes

• FTSE MIB (ITA40 on xStation5) remains firm, EURUSD under pressure ahead of the elections

On the 4th of March Italians will go to the poll stations to take part in the general elections. As the Euroscepticism is on the rise in the Europe’s third biggest economy the eventual victory of an anti-establishment and populist parties may pose a threat to the unity of the EU bloc. We take a look at election predictions and what could that mean for the markets: ITA40 and EURUSD. 

How did we get there?

In 2016 former Italian Prime Minister Matteo Renzi proposed a pack of the constitutional reforms which were later put under vote by Italian people in the referendum. PM Renzi stated that if he loses the referendum he wwould resign from his post. As this was the case he was replaced by a member of his party, Paolo Gentiloni. Among reforms proposed by Renzi was the new electoral system that would even out differences between electoral systems for the upper and lower houses of Italian Parliament. Gentiloni’s government worked towards development of a new electoral law throughout 2017 and it was finally passed in the October 2017. On 28th of December 2017 the Italian Parliament was dissolved by President Mattarella and the next general elections were scheduled to take place on the 4th of March.

Rosatellum – new electoral system

The upcoming general elections will be the first one to be held under new electoral system called Rosatellum. It has few differences against the previous system but crucial ones. First of all, the new electoral system is a mix of two other electoral systems. More than a third of seats in both, Chamber of Deputies and Senate, will be granted in the single member districts through first-past-the-post system (FPTP). The FPTP voting method is system in which the candidate who gets the most votes wins. This will be the case for 232 seats in the Chamber of Deputies and 116 in Senate. The remaining seats will be granted through regional proportional representation and about 2% of all members in both chambers will be elected by the Italians living abroad. However, probably the most important difference against the previous system is that the Rosatellum favours pre-announced mainstream coalitions (the ones that will be participating in the same voting lists) as the populist parties seem to lack experienced candidates that would succeed in the local constituencies in the FPTP vote. The entering threshold for the coalition was set at 10% while for the single party it is 3%. What is more, under Rosatellum law party or coalition winning 40% of the votes will not get automatic majority as it was the case in the previous electoral system.

Who is participating?

There are six main parties taking their chances in the upcoming elections:

• The Five Star Movement (M5S) is an anti-establishment group led by Luigi Di Maio. Among its proposals are introduction of minimum monthly income of 780 euros and renegotiation of the European Fiscal Compact. Moreover, Di Maio’s party heralded that once it wins elections it will repeal over 400 laws what for example would allow Italians enter earlier retirement. Apart from that, the Five Star Movement is said to improve country’s relations with Russia.

• Forza Italia (FI) is a centre-right party led by the former prime minister Silvio Berlusconi. However, Berlusconi himself is not allowed to run in the elections as a repercussion of the tax fraud convictions. The group wants to introduce parallel currency for domestic use while euro will be kept for the international transactions. Moreover, it wants to provide single, flat rate income tax for companies and individuals as well as abolish housing, inheritance and capital gain taxes. The party is also stating that it will block new immigrant arrivals.

• Northern League (LN) is a radical right party led by Matteo Salvini. It promises to abolish European Fiscal Compact as well as introduce universal flat tax rate at 15%. Moreover, party representatives want to stop immigration issues by repatriation of 100,000 illegal immigrant each year. It also opts for improving relations with Russia.

• Brothers of Italy (FdI) is a southern radical right-wing party with neo fascist roots led by Giorgia Meloni. It is a southern equivalent of the Northern Light party and its proposals are more or less the same.

• The Democratic Party (PD) is a centre-left party led by Matteo Renzi, the former prime minister who resigned from his post. Among its proposals one can find increment of the minimum wage, abolishment of the European Fiscal Compact as well as raising the budget deficit to 3% of the country’s GDP. The party is viewed as a pro-European.

• Free and Equal (LeU) is a left-wing party led by the Pietro Grasso. It is a party uniting politicians that left Matteo Renzi’s group. It proposes to repeal labour and pension reforms as well as boost public spending.

The Five Star Movement (M5S) is currently leading in polls. Source: Financial Times

Taking a look at the latest polls one can see that the distance between the Five Star Movement and the Democratic Party has been increasing as of late. However, despite holding the leading position M5S may struggle to perform well in the local constituencies as it lacks experienced candidates what seems to be a crucial factor in order to succeed in the FPTP part of the elections. One should also keep in mind that around 30-40% of the voters are still undecided therefore the final outcome may differ significantly from the one suggested by the polls.

Who allies with who?

As we have mentioned before new electoral system favours coalitions over single parties thus in the upcoming elections we will see parties group together in order to ensure passing the entering threshold. However, there are two big parties that refuse to enter coalition with other parties and they will run independently trying to achieve their own goals. These parties are Five Star Movement and Free and Equal. Other parties grouped up into two major forces. The center-left coalition was formed by the Democratic Party and some minor peers like More Europe or Together. On the other hand, we have centre-right coalition grouping parties like Forza Italia, Brothers of Italy and Northern League Act.

Berlusconi’s centre-right coalition is expected to win the most votes in the upcoming general elections. Source: Financial Times

According to the latest polls the centre-right coalition led by the Silvio Berlusconi’s Forza Italia is expected to win the most votes in the upcoming elections. However, even with if the outcome heralded by the polls turns to be true no coalition will be able to rule independently. Commentators say that in order to avoid repeated elections centre-left parties and centre-right parties may form a broad coalition. However, given the differences in the goals each of this coalitions aim to achieve the functionality of the government formed this way may be highly questionable.

How could the outcome affect the stock markets?

Potential victory of the right wing parties may harm the Italian economy as they are planning to undo some of the reforms that improved the outlook of the public finances. On the other hand, the outcome resulting in the hung parliament may cause the political impasse and therefore limit the ability of introducing new reforms. Interestingly when Renzi lost the referendum a negative reaction was short lived and markets qucikly surged higher. However, back then the situation was different – ITA40 consolidated just above lows and a reduction of uncertainty served as a catalyst for a rally.

ITA40 opened significantly lower following Renzi’s referendum but covered a gap quickly and surged higher. Source: xStation5

This time there’s a potential for a head and shoulders formation and a downward pressure form global markets. Do notice that despite political uncertainty ITA40 still behaves much better than DE30. A break of 22000 support zone could have far reaching repercussions.

ITA40 looks fragile compared to DE30. Source: xStation5 

EURUSD has broke through the 1.22 support under a pressure from the double top formation. Bullish trend is at stake as the dollar gains. We see a combination of supports between 1.2080 and 1.21 – local highs from early Janaury, a lower limit in a channel and a 150-day moving average. 

EURUSD is under pressure from a double top formation, looks towards a accumulation of supports around 1.21. Source: xStation5 

When can we expect the outcome to be published?

The vote will take place on Sunday, 4th of March. The polling station will be open from 6:00 am BST to 10:00 pm BST. Having that in mind, we can expect first exit polls to be published within an hour following the closure of polling stations. However, the official result is not expected to be released until 1:00 pm BST on Monday.