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Italy elections heightens turbulence for EU

by LLB Editor
21st Aug 19 10:47 am

Since Italy joined the Euro in 1999 they have seen stagnant annual real GDP growth of less than 0.5% against a government debt to GDP burden of 132%. The numbers are no rosier for individuals as since the depths of the financial crisis, Italy’s GDP per capita has never really recovered, in stark contrast to other developed market nations. This fragile economic backdrop leads to a fractious political backdrop and it is as a result of this that the current Italian government is the 66th since World War II.

That’s a lot of change, when you consider over the same time, the UK with Boris Johnson has only just entered its 16th change in Prime Minister (although it seems the UK is doing its best to make up for lost time recently). The electoral differences explain much of the difference between the two countries’ experiences; Italy has proportional representation as part of their electoral rules, though new rules last year also introduced elements of a British-style first-past-the-post. Broadly speaking, in Italy, just over a third of seats are decided by winner-takes-all votes in individual constituencies, with the rest allocated in proportion to the number of votes each party receives.

Why it is an issue now

taly’s ruling populist collation now looks to be heading for collapse after the technocratic PM Guiseppe Conte said this week that he would start proceedings to recall the Italian parliament for a vote of no-confidence, a vote which has been requested by one half of the two-party ruling coalition – Matteo Salvini, League party leader, who has been at odds against his coalition partner Luigi Di Maio, the leader of Five-Star. Ultimately, the decision for new elections rests with the Italian President Sergio Mattarella, but these latest developments add to uncertainty for markets.

Why it is important

If we do see an election it is likely to be neatly parked within the end of October corridor of uncertainty for the Eurozone. On 20th October we have the deadline for the Italian budget, 31st the Brexit deadline and on 1st November a change of leadership at the major EU institutions.

What do Brooks MacDonald think

We continue to see risks to Eurozone as a “taker” of global growth where we see headwinds currently – unhelpful where exports continue to be an important factor to any improvement in outlook, especially so for its largest GDP contributor Germany whose exports made up some 47% of its GDP in 2017 according to World bank estimates. Adding in the political risks, not just of Italy, but of a more populist dominated European Parliament following the elections in May, we see these risks outweighing the relative valuation attractions for Eurozone equities for the time being.

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