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Italy: Global Linchpin

June 20, 2017 | Multi-Asset


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During late April and early May, the world was focused on the general elections in France. While the odds of a Marine Le Pen victory were quite small and a subsequent vote to leave the European Monetary Union (EMU) even smaller, investors were looking at France as a barometer of populism across Europe. And even though Emmanuel Macron won the French election, a significant populist risk still resides in Italy.

The market has recently taken notice for two reasons: because the French elections have now passed, and because of the rumblings that a new electoral law may soon be agreed upon in Italy. While the prior proposal was struck down in court, there are now rumors that former Italian Prime Minister Matteo Renzi is working in the background to coalesce around a proportional representation system similar to that of Germany.

If this change occurs, there will likely be an early snap election. And that possibility is spooking Italian markets—in particular financials—because Italy is the one country where a good deal of the population is in favor of leaving the EMU.

The Five Star Movement's Eurosceptic stance and the strong desire to leave the EMU is what we consider the biggest risk in their agenda and the biggest risk to Europe currently.

The populist Five Star Movement is neck-and-neck with the ruling Democratic Party (PD) in recent polls. The Five Star Movement's Eurosceptic stance and the strong desire to leave the EMU is what we consider the biggest risk in their agenda and the biggest risk to Europe currently. If they were to come into power, it increases the likelihood of a referendum similar to Brexit. And if the referendum passes, then global markets would have to face the potential dissolving of the EMU.

If an Italian snap election were to occur, the most likely time would be close to Germany's September election. With such close proximity, investors would likely view the time between now and September with unease. And we are starting to see some of that unease already.

At this point, the established PD party has improved a bit to pull virtually even in the polls with the Five Star Movement. In the end, while we believe that Italy does hold significant risk to the EMU, this risk still has many obstacles that make it less than probable. Based on current polling, the Five Star Movement would lack an absolute majority. This would mean they would need to form a coalition, which would be a mighty task given that no other parties currently align themselves with the Eurosceptic populists. Additionally, it's unlikely for the anti-EMU movement in Italy to win a referendum—not impossible, but also not likely. And even if the Five Star Movement won the snap election, Italy would need to change its constitution before it could even hold a referendum.

Uncertainty about Italy's geopolitical situation is presently disturbing European markets. Longer-term, we think what evolves in Italy is among the most important global developments on which to currently focus. We will continue to closely monitor this geopolitical situation to navigate any investment opportunities or risks.