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Italian election and ECB changes

09 March 2018

What influence does the Italian election result have?

Last year, many people were concerned about the rise in populist anti-establishment political movements but the French, German and Dutch elections passed off without any of these parties gaining power.  Now, in the Italian election, the Five Star Movement (Movimento Cinque Stelle) appears to have won with the highest proportion of the vote. Notably, the anti-immigration League (Lega) also won the biggest share of votes within the centre-right bloc, surpassing Berlusconi's party for the first time.  The centre-right block, made up of three parties combined, had a marginally greater vote when compared to Five Star, but both of them only got about a third of the vote.  Many people will be relieved that the constitutional changes that were voted on last year failed.  If these had passed then Five Star could have been handed a victory.  As it is, a coalition government will have to be formed and people are now trying to guess what the possible coalitions could be. The President of the Republic, Sergio Mattarella, has the responsibility to nominate the person who is more likely to win trust from the parliament as Prime Minister, but this will not be easy task given the election outcome.

In the past, the Five Star party has always ruled out any coalition and it is hard to see how any of the parties can combine to form a government.  There will be a lot of wrangling to come and in the end, Italy could be left with a minority government or a technocrat administration, not formed by any particular party, which may lead to another election in the not too distant future.  Italy has a long history of governments that don’t last and the next one is unlikely to be an exception.  The government is likely to be weak which means getting changes through will be difficult.  While this does not make a good government, it avoids the excesses of some of the extreme parties.

It is a reminder that populism is not dead but it does show how hard it is to form a new party and gain power (in France Macron succeeded with En Marche but he was not anti-establishment). Perhaps more dangerous is anti-establishment movements acting through established parties.  President Trump can be seen as the result of such a move.  In this country Jeremy Corbyn and the Momentum group may be another example.  These politicians lash out at easy targets and propose crowd pleasing policies with little care for balancing the budget.  However when these politicians gain power it is often hard to press ahead with their policies, as Trump has found out. 

For now, the election in Italy has had little impact on markets domestically or in the wider European markets.  Indeed, while market participants have been concerned about political change, in the end it has been right for investors not to react to these events.  This may not always be the case and in Italy we shall have to watch for the alliances being formed.

Should we be worried by the changes of wording in the ECB statement and was there anything more significant to note?

At yesterday's meeting, the European Central Bank ("ECB") voted unanimously to remove the language indicating that asset purchases could increase in size and/or duration if needed.  When it had announced the reduction in asset purchases at the end of last year it had kept this wording giving a little balance to the tightening announcement.  The change of wording is another small step towards removing the support the ECB has been providing to markets.  The initial market reaction was for the euro to move higher but this reversed following Draghi's comments in the subsequent press conference.

When Draghi was quizzed about the introduction of protectionist measures, he said the tariffs were dangerous and "if you put tariffs against those who are your allies, one wonders who the enemies are".  He also stated that past experience showed that such policies have unintended consequences, an example being a stronger dollar. Following the press conference, we saw some dollar strength against the euro despite what had appeared to be a hawkish assessment on the prospects of the Eurozone economy.

Later in the day President Trump signed the tariffs on steel and aluminium but has allowed for application for exemptions. He stated that: “We have to protect and build our steel and aluminium industries, while at the same time showing great flexibility and cooperation toward those who are really friends of ours, both on a trade basis and a military basis,”. This will be welcomed by Canada and Mexico in particular who are the largest exporters of these materials to the US as the North America Free Trade Agreement (NAFTA) renegotiations are still ongoing. By acknowledging the military "friends" this opens to the door to further exemptions in Australia and Europe.

Overall, the change in wording is of little significance but a small step on the road to normalising monetary conditions.  If this process continues to be slow and it is against the background of a stronger economy equity markets should not be too concerned.



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