As if Europe hasn’t got enough on its plate — war in the East, rampant inflation and an energy crisis — now Sunday’s general elections in Italy is poised to deliver a far-right coalition led by Giorgia Meloni, whose Brothers of Italy party has fascist roots, a populist fiscal policy and deep Euro-skepticism. So what would a Meloni government mean for markets, both within Italy and beyond? Here are some things to consider.
Watch the spread. The yield spread between the benchmark Italian 10-year government bond (BTP Italia)
and the German equivalent (Bund)
is the most closely followed gauge of how investors view Italy’s prospects. Generally, the greater the angst about Rome’s fiscal position — it has a debt-to-GDP ratio of about 150%, double that of Berlin — the greater the yield differential, as investors demand more income for taking on the perceived risk of holding Italian paper. The good news is that the spread, currently around 220 basis points, suggests that for now, the market is relatively sanguine about a Meloni-led administration, betting that its desire to provide inflation-busting subsidies to households and businesses will be constrained by its need to tap assistance from the European Union and the bloc’s central bank. Paolo Pizzoli, senior economist for Italy and Greece at ING
says that if the expected new government delivers few wholesale changes to the 2023 budget, markets would consider that a welcome sign of budgetary restraint.