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Designated Prime Minister Giuseppe Conte addresses the media at the Quirinale Palace in Rome on Thursday. (Keystone)

Eurozone Italy: New coalition, same PM?

29 August 2019, 4:02 pm CEST, written by UBS Editorial Team

Italy’s M5S and the Democratic Party (PD) have agreed to form a new coalition government under former Prime Minister Giuseppe Conte. If successful, the pact would avert snap elections following the collapse of the previous M5S-Lega coalition. However, the new M5S-PD government is not yet a done deal – as CIO explains.

Giuseppe Conte resigned as Italy's prime minister (PM) agenda. "The priorities announced by both political on August 20 following threats by then-coalition partner forces include improving Italy's relationship with the EU, Lega to withdraw its support for the government. Little approving a budget to avoid the automatic 3-percentage- more than a week later, he appears set for a return. On point VAT increase, and focusing on environmental Wednesday, the anti-establishment M5S and center-left PD sustainability," Ramenghi says. agreed to form a new coalition with Conte at the helm – and with Lega sidelined. At a meeting on Thursday Markets have reacted positively to the prospect of greater morning, President Sergio Mattarella gave the ex-PM a fresh political stability. Spreads on Italy’s 10-year bond yield mandate to govern. declined 10 basis points, narrowing the 10-year Bund-BTP spread to a 15-month low. However, despite the progress of recent days, CIO cautions that the new coalition is not yet a done deal. "Obstacles CIO expects investors to remain broadly supportive of the still need to be overcome in areas such as assigning the formation of an M5S-PD government. Conversely, a sudden key ministerial roles and passing a confidence vote," says breakdown in negotiations and the renewed prospect of CIO economist Matteo Ramenghi. In addition, M5S leader elections could create pressure on Italian assets. Luigi Di Maio has indicated that the deal with the PD would need to be approved by his party's members in an online From a macroeconomic perspective, Italy continues to face consultation. challenges including sluggish growth and a significant debt burden. "The political uncertainty over the last few months While M5S and PD may appear unlikely coalition partners has heavily affected sentiment and negatively impacted – and questions have been raised over how long their companies' investment plans," Ramenghi notes. "Better alliance might last – CIO notes that they share broad political stability may lead to a capital expenditure recovery, policy consistency in many areas. This could make it less albeit in the context of decelerating growth globally." challenging for the two sides to agree on a coalition UBS Investment Insights For UBS marketing purposes

For more, see Italy: Toward an M5S-PD government, 28 August, 2019.

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