What to expect from Italy’s General Election

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Italians will head to the polls on Sunday 4th March for the country’s general election, in what could shape up to be a fairly significant event risk for Italy, the wider Eurozone and indeed the Euro.

The Eurosceptic, right-wing Five Star Movement Party (M5S) is ahead in almost all of the recent opinion polls. A government including the populist party, which has until recently called for the country to ditch the Euro and hold a referendum on EU membership, could be negative to the wider European Union project. It would also inevitably have ramifications for how the country deals with its massive public debt, and may impact an economic recovery that has recently picked up steam following a number of years in the doldrums.

However, the Italian election process is historically complex, making the formation of a majority government next to impossible and all but ensuring a broad coalition involving several parties. A hung parliament and prolonged period of coalition talks is likely. Even in a scenario where the Five Star Movement Party emerges as the largest single party, a government including Beppe Grillo’s M5S is far from guaranteed. The party has ruled out forming a coalition in the past, although this stance has softened. A centre-right or centre-left coalition excluding M5S seems the more likely scenario. That being said, coalition negotiations could take months and it is not out of the realms of possibility that another round of elections could be called should negotiations reach an impasse.

Given Italy’s importance to the Eurozone (the country’s economy is the third largest in the currency bloc and accounts for around 15% of its overall GDP), financial markets will be watching closely as the official result is announced at around 14:00 local time on Monday 5th March. With opinion polls in recent European elections proving wildly inaccurate, investors will be taking nothing for granted and the Euro could be set for a volatile few days of trading following the vote.


Who are the main parties in the running?

The Five Star Movement (M5S)


Luigi Di Maio

Political Position

Big Tent

Current Seats

88 Chambers (C), 35 Senate (S)

Polling Average


Odds of Obtaining Most Seats*



Luigi Di Maio’s M5S has a reasonable chance of forming a government after the party moderated its stance on entering into a coalition, albeit this remains a tail risk. The party has been strongly Eurosceptic in the past, although this has softened since gaining popularity. Di Maio said in January ‘it is no longer the right moment for Italy to leave the Euro’ and while he hasn’t ruled out the possibility of an EU referendum, has claimed that it would be a ‘last resort’. A government led by the M5S would be the worst case scenario for the Euro.


Democratic Party (PD)


Matteo Renzi

Political Position


Current Seats

322 C, 128 S

Polling Average


Odds of Obtaining Most Seats



The strongly pro-European Democratic Party will be hoping to remain in power following their election victory in 2013. The party’s campaign has been based on their overseeing of the country’s recent economic rebound and declining unemployment. A PD-led government and continuation of the status quo would likely be the best case scenario for the Euro.


Forza Italia


Silvio Berlusconi

Political Position


Current Seats

119 C, 86 S

Polling Average


Odds of Obtaining Most Seats



Silvio Berlusconi’s Forza Italia has moved back into third place in the polls in recent months. Forza Italia is in favour of introducing a widely criticised flat tax, while the party is also strongly anti-immigration. Berlusconi himself is currently banned from holding office due to a tax fraud conviction and has nominated his long-time lieutenant Antonio Tajani to be the Prime Ministerial candidate.


Lega Nord


Matteo Salvini

Political Position


Current Seats

15 C, 12 S

Polling Average


Odds of Obtaining Most Seats



Lega Nord also has a staunch anti-immigration view, favouring a tough stance on crime, while voicing a desire to improve relations with Russia. The party has experienced a relatively sharp increase in support since the last election and is on course to obtain around 13-14% of the vote according to recent polls*.

*According to Betway (27/02/2017)


What is the likely outcome of the election?

The final opinion polls prior to the 15 day blackout period showed a fairly tight race. The Five Star Movement Party was marginally ahead and could conceivably form a coalition government, possibly with the backing of the centre-left. A more likely outcome would be the coming together of the pre-formed centre-right coalition alliance led by the resurgent former Prime Minister Silvio Berlusconi’s Forza Italia. A centre-right coalition involving Forza Italia (15.9% in the latest poll), Lega Nord (14.8%), Fratelii d’Italia (5%) and Noi con L’Italia (1.8%), may have just enough share of the vote in order to obtain a majority.

A centre-left coalition led by the currently in power Democratic Party is also a possibility, although the centre-left alliance is currently only polling at around 25-26%. Caretaker Prime Minister Paolo Gentiloni ruled out a grand coalition with Berlusconi’s centre-right in January, although opinion polls suggest that this is entirely possible. It is worth noting that opinion polls prior to recent European elections have been way off the mark and were widely inaccurate at the last Italian general election in 2013. Some 30-35% of voters also remain undecided, which could prove a key factor.

Political prediction market PredictIt is currently placing only around an 18% chance of Luigi Di Maio holding the post of Prime Minister come the end of July (Figure 1), with Antonia Tajani and Paolo Gentiloni seen as much more likely alternatives.

Figure 1: PredictIt Italy Prime Minister Odds [on 31/07] (December ‘17 - February ‘18)


Source: PredictIt Date: 26/02/2018

How will the election impact FX markets?

The Euro has so far taken the prospect of another major European election in its stride. Despite suffering from one of its worst weekly performance since October last week, the currency continues to trade just shy of more than three year highs against the US Dollar. In fixed income markets, the spread between 10 year government bonds in Italy and Germany has declined since late-2017, although jumped to a one month high last week. Italy’s 10-year government bond yield posted its largest weekly rise of the year so far on Friday (Figure 2), suggesting that investors are placing somewhat of a risk premium on Italian assets leading up to the election.

Figure 2: Italy/Germany 10 Year Bond Yield Spread (2014 - 2018)


Source: Thomson Reuters Datastream Date: 26/02/2018

With a hung parliament likely and heavily priced in, we think FX markets will be impacted more by the coalition negotiations than the election itself. We outline five distinct outcomes in order of likelihood and their potential impact on the Euro:

  • Right-wing minority (or majority) coalition. Minority coalition would have limited impact on the Euro. A surprise majority for the pre-formed centre-right alliance that eliminates a long, uncertain period of negotiations could, however, provide a small, short term boost for the common currency.
  • Grand Coalition between Forza Italia and Democratic Party. Euro impact dependent on terms of deal but probably limited.
  • Left-wing minority coalition. The formation of a centre-left coalition would likely provide modest, short term support given it would ensure a continuation of the status quo.
  • Five-Star led anti-establishment Government. In the event that the Five Star Movement party forms a coalition we would expect a fairly sharp downward move in the Euro, albeit the party’s backtracking on calls for an EU referendum would lessen the move.
  • New elections called. Politicians will be keen to avoid fresh elections, but this cannot be ruled out. We would expect the subsequent prolonged political uncertainty to pressure the Euro downwards.


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