Partner Center Find a Broker

Italian politics have been on the headlines recently, thanks to the coalition deal between the 5-Star Movement and the League.

And if you’re wondering what all the hubbub about Italian politics is all about, then perhaps this quick primer will help you out.

5-Star Movement? League?

The 5-Star Movement (Movimento 5 Stelle) and the League (Lega Nord per l’Indipendenza della Padania) were two of the main winners of the March 2018 Italian elections.

However, the 5-Star Movement, which captured the most seats in Parliament, only had 265 seats in the Chamber of Deputies (out of 630) and 137 seats in the Senate (out of 315).

In other words, the 5-Star Movement failed to capture an outright majority, which resulted in a hung Parliament. And to address this, the 5-Star Movement needed to enter into a coalition government.

And after months of negotiations, the 5-Star Movement and the League have finally had a meeting of the minds and agreed to form a coalition government.

Oh, for those who don’t know, the 5-Star Movement is labeled as a “populist” party. And while the 5-Star Movement is not technically a right-wing party, it does hold positions that are considered to be on the right side of the political spectrum, such as the party’s opposition to the E.U.’s open doors policy and mass immigration.

The 5-Star Movement also had an anti-E.U. and anti-euro stance in the past. Although Luigi Di Maio, the current leader, has toned down the party’s anti-E.U. stance. Di Maio even said recently that the E.U. is the “casa” or home of the 5-Star Movement.

As for the League, it used to be a right-wing regionalist/secessionist party, hence the “Indipendenza della Padania” (independence for Padania) part of its full name.

However, the League has adopted political positions that are more pan-Italian nationalist and populist in recent years, such as Euroscepticism and opposition to mass immigration, especially from non-compatible cultures such as Islamic countries.

Has Italy formed a new government?

Not yet. The 5-Star Movement and the League have already agreed to form a coalition government. And Sergio Mattarella, the Italian President, has already consulted with both parties. But as of today (May 24), the coalition government has yet to be formed.

What are the steps for forming a new government?

The 5-Star Movement and the League need to agree on a candidate for Prime Minister (PM). Mattarella then needs to formally appoint the PM and give him/her a mandate to form the new coalition government.

The PM would then talk with the 5-Star Movement and the League in order to come up with a list of ministers. Once that’s done, the new government would be sworn in.

After that, the new government needs to secure a vote of confidence from the two chambers of Parliament: (1) the Senate of the Republic (Senato della Repubblica) and (2) the Chamber of Deputies (Camera dei Deputati).

If a vote of confidence can’t be secured within 10 days, then Italy will fall under a caretaker government and fresh elections will likely be called.

Has a new Prime Minister been appointed?

Yes . Both the 5-Star Movement and the League named Giuseppe Conte, a law professor and lawyer, as their PM of choice.

And after balking for a bit, Mattarella has already appointed Conte as the PM and then gave him the mandate to form a new government.

What does the potential coalition plan for Italy?

Last week, the 5-Star Movement and the League issued a 58-page document titled “Contratto Per Il Governo Del Cambiamento” (Contract for Change in Government) which is basically the joint manifesto of the two parties.

And below are the most relevant provisions in terms of the economy and Italy’s relationship with the E.U.

  1. The document states that there are about 500,000 ILLEGAL immigrants in Italy. And it would be the coalition government’s “prioritaria” or priority to kick them out A.S.A.P. Germany, Sweden, and the other E.U. Member States that love mass immigration will very obviously hate this.
  2. In terms of foreign relations, the coalition government would confirm Italy’s membership in NATO. However the coalition government does not see Russia as a “minaccia militare” or military threat. Rather, Italy sees Russia as a potential “partner economico” (economic partner).
  3. Also with regard to Russia, the coalition government wants to invite NATO and the E.U. to work with Russia in fighting Islamic extremism and uncontrolled migratory flows.
  4. The coalition government proposes a basic income of €780.00 per month per person to help poor, unemployed people. However, this is conditional on the person getting a job from employment centers. If the person refuses to get a job like a good, productive citizen, then that person will no longer get financial support.
  5. In line with the above, the coalition government wants to raise the minimum pension to €780.00 per month and introduce other pension reforms.
  6. The coalition government rejects austerity. Instead, the new government wants to reduce Italy’s debt by reviving domestic demand and creating favorable conditions for Italian exporters.
  7. In order to promote domestic consumption, the new government wants to introduce a flat tax with fixed rates at 15% and 20%. Families will also enjoy up to €3,000.00 in deductions, depending on the family’s income.
  8. The document also calls for a review of the E.U.’s governance and fiscal rules, which opens the door for a potential challenge to the E.U.

How do investors view the potential coalition?

Investors generally don’t see the potential coalition in a favorable light for two main reasons: (1) the parties involved are “populist” parties with Eurosceptic tendencies; and (2) Italy’s debt is ginormous.

The line dividing the two is actually rather blurred, though.

You see, Italy may be the third largest economy in the Euro Zone but Italy also happens to have around €2.3 TRILLION in debt, which is seven times larger than Greece’s debt and is also the largest debt in the whole Euro Zone (and fourth largest in the world to boot).

So if Greece’s debt crisis was bad, then an Italian debt crisis could potentially be worse. Much worse.

From the perspective of investors, Italy’s high debt is terrible but not too frightening… as long as the government is mostly in line with the E.U. and accepts austerity.

However, the 5-Star Movement and the League both reject austerity. And in their joint manifesto, they even set out their plans to reduce taxes and increase spending while adopting some policies (such as on mass immigration and relations with Russia) that puts Italy into a collision course with the E.U.

And that does increase the chance that Italy may default on its loans without the ECB to help save it. And that, in turn, will likely result in capital flight from Italy and the Euro Zone, damage to the Euro Zone economy, the possibility of a spill over to the global economy, and lots of other bad stuff we don’t even want to think about.

And while the 5-Star Movement and the League didn’t challenge the euro or include plans to leave the Euro Zone in their manifesto, the Huffington Post was able to acquire a leaked draft of the earlier manifesto, which did include plans to leave the euro.

And according to a report from ANSA, the 5-Star Movement and the League both supposedly want Paolo Savona as the economy minister of the new government. And for those who don’t know, Savona is rabidly anti-euro. Savona once even openly stated that the euro is a “noose around Italy’s neck.”

It’s therefore possible that the two parties may decide to implement plans to leave the Euro Zone down the road and we’ll get an Italian version of Brexit, but with a potential debt crisis as an added bonus.