The defeat of Mr Renzi’s centre-left party and government will worry markets a bit whilst the politicians try to construct a coalition government from the results.
The two big winners seem to be Luigi Di Maio, the leader of the Five Star Movement which emerges as the largest single party, and Matteo Salvini, the leader of the Lega party that secured the most votes within the centre right coalition. The Centre-Right Coalition as a whole outpolled Five Star, so either have a chance to lead a government.
Five Star stood on a programme of increased public investment, tax cuts, better financial support for those seeking work, some controls on migration and a better deal on pensions. They favour more commitment to digital technology and more sustainable development. The Lega stood on an anti-migration ticket, favouring tax cuts and wanting to rewrite Italy’s relationship with the EU by removing many EU powers over them. Between them they may have gained the support of half of those voting.
The Centre-Right Coalition between Silvio Berlusconi’s Forza party and the Lega stood on a much watered down version of the Lega programme. Where Lega wants to leave the Euro and rollback all the European Treaties from Maastricht onwards, Forza proposed staying in the Euro and not confronting the EU so fundamentally. They agreed to propose a law to assert the primacy of the Italian constitution over the EU, but not to demand an exit from various parts of the EU Treaties or from the Euro. They also agreed on some restrictions on migration and on tax cuts.
From this position if Mr Berlusconi and Forza accept the leadership of Salvini and the League they could form together the majority base of a new coalition, but would need co-operation from Five Star to be able to win votes and put through a programme.
The Centre-Right has more in common with Five Star than with Renzi’s party, and they could hammer out a programme of tax cuts, spending and investment boosts, technology and work boosting measures. They would also need to do something about migration policy, probably along the more moderate lines of the Five Star Manifesto than Lega’s much tougher approach.
The EU would prefer a coalition led by the Democracy Party, the old centre left party that was in government prior to the election and is accommodating to EU policy generally. So far that party is accepting its defeat and talking of going into opposition. There may be enough seats between Democracy and Five Star were the Democracy party to change their minds and go into alliance. Such a coalition would presumably play down the Euroscepticism of the Five Star Manifesto but would need to adopt much of the Five Star budget expansion policy which is likely to be the minimum requirement for Di Maio to accept.
In due course a coalition government should emerge. There is no reason to suppose opting for another election would be popular with the parties or lead to a very different result. Any coalition is likely to want tax cuts, more investment, and some additional controls over migration. It could be at variance with the EU over the scale of permitted deficits and over how far it can go in limiting freedom of movement.
The Italian result continues the attacks on Euro area austerity and migration policies that have undermined the voting base of many of the traditional pro EU centre-right and centre -left parties throughout the Euro area. The economic programme likely to emerge may well be a bit more reflationary, which would be helpful for the Italian economy. Meanwhile some in markets will worry about the deficits and the amount of extra debt the Italian state can assume.
John Redwood is chief global strategist at Charles Stanley.
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