Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research Macro Note : No World Cup, But New Elections Likely

Wednesday, 30 May 2018 What Happened? The Italian political situation has deteriorated after Italy’s President prevented the populist alliance of the and the League from forming an obscure, anti-European government. Instead, he asked interim Prime Minister Carlo Cottarelli, a former International Suan Teck Kin, CFA Monetary Fund (IMF) official, to form an interim government of technocrats. Head of Research [email protected] The country has been trying to form a new government since the 4 March 2018 elections (“Italy: On Lee Sue Ann Course For A Hung Parliament” dated 5 March 2018) despite several rounds of coalition talks. But Economist [email protected] the latest crisis erupted in late May, following the choice of the economic/finance minister. and , leaders of Five Star and League respectively were proposing Professor , who has been critical of the euro and the single currency in the past.

So, What Now? In line with the constitution, after the government is formed, it has to go before the parliament for a confidence vote. PM Cottarelli on this point has been quite clear:

ƒƒ If his government wins the confidence vote: He will remain in office until early next year. His government will work essentially on the approval of a new budget for 2019, defusing the VAT increase, that otherwise will take place in January 2019.

ƒƒ If his government loses the confidence vote: The country will go to polls in early September in order to provide enough time for a new government to be formed and then approve the budget before year-end. To provide credibility to the temporary nature of his government, Mr Cottarelli said that neither him nor his ministers will participate and be candidates in the next general elections.

What Makes This A Crisis? The latest deadlock could Populist Parties In force President Mattarella Total 630 Seats back to parliament in the Source: Corte di Cassazione coming days and send Italians back to the polls as early as 29 July (but likely from September). Unlike the first inconclusive vote held earlier this year on 4 March, it remains unclear what platform populists will run on in the new elections. As such, the outcome of new elections is perceived as more risky due to the possibility that the next vote could turn into a proxy referendum between pro-Europe/pro-euro mainstream forces, and the antagonist alliance of the two populist parties that won the most votes in March – the Five Star Movement and the League.

Italy: No World Cup, But New Elections Likely Wednesday, 30 May 2018 1 I Page Who Might Win The Next General Elections? Prior to the eruption of the current crisis, as per the opinion polls, the League () is experiencing good momentum and it Italy Opinion Polls For Next General Elections is credited with around 22-24% of the vote (+5-7 ppt since March Source: Macrobond, UOB Global Economics & Markets Research general elections) whilst Five Star is has been broadly stable at around 32% since the March vote. The dynamics have changed since, though, with Five Star now losing ground, whilst the popularity of the League has been constantly increasing since the vote.

Italy: Too Big To Fail, Too Big To Bail? Indeed, the (EU) and global markets are watching nervously. In an echo of the Greek debt crisis, the latest turmoil has reopened a political rift between Germany and the “peripheral” economies of Greece, Italy and Spain. That political divide will further complicate ongoing efforts to resolve Italy’s debt burden. This point is important as Italy has the 4th largest debt balance in the world, despite the size of the economy being the 9th largest (smaller than Brazil at 8th and France at 7th). Italy’s debt-to-GDP ratio of 132% is the largest among the economies and has worsened significantly since the Eurozone debt crisis in 2011/12 despite a range of austerity measures since that time. Indeed, to the Italians, bread-and-butter issues of economic situation and jobs remain the top priorities, as reflected consistently in the opinion polls.

Concerns that spark worries about the European project’s future, such as the Greece crisis in 2010-2015 (and to a lesser extent, Brexit in July 2016), would certainly cause downward pressure on European asset prices. It has taken tremendous efforts by the core European countries, the European Central Bank (ECB) and multilateral agencies such as the IMF to keep the Greek crisis under control. In Italy’s case, however, the situation is far more acute and protracted compared to Greece, given the relatively large size of the economy (3rd largest in the Eurozone) and the amount of debt. Could Italy be a case of “too big to fail” and “too big to bail”?

The Eurozone’s Third-Largest Economy Has Been Anemic For Years Italy’s PMI Underperforms

Source: Macrobond, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research

Italy: No World Cup, But New Elections Likely Wednesday, 30 May 2018 2 I Page Unemployment Remains High Debt Levels In Italy Continue To Rise

Source: Macrobond, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research

Despite Austerity Measures, Italy’s Debt-To-GDP Ratio Remains Close Italian Bank Lending Has Been Sluggish Over The Past Year To 130% - Highest In The Eurozone

Source: Macrobond, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research

32% of Italian Govt Bonds Are Still Held By Foreign Investors The 3 Most Important Issues Facing Italy, According To The Electorate

Source: Macrobond, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research

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