The centre-right coalition won the Italian general election on 25 September by a large margin. Right wing Fratelli d’Italia (FdI, or Brothers of Italy) and its leader Giorgia Meloni were the clear winners, collecting 26% of the votes. However, even if the other two major parties of the coalition, the League and Forza Italia (FI), obtained less than 9% each, their seats are decisive for the majority in Parliament and guaranteeing stability for the government.
Markets reacted negatively to the outcome. The yield spread between Italian and German government bonds rose to almost 260 basis points the day after the vote. Subsequently, the spread has fallen but, at the time of writing, remains above the levels prevailing in July before the collapse of the Draghi government led to early elections.
The new government will only take office in the second half of October. So far, would-be Prime Minster Meloni has made very cautious comments on fiscal policy, aligned with the position of Mario Draghi’s caretaker government. Nonetheless, investors fear for Italy’s reliability. To prevent spreads from increasing as in 2011 and 2018, the priority of the new cabinet must be to reassure international partners and financial markets.
In the coming weeks, three issues will be in the spotlight:
- The composition of the government, in which highly respected personalities with an international profile should be included while excluding politicians responsible for past tensions with the EU;
- The position on Russia, for which Meloni must confirm Italy’s alignment with the EU political line, including on sanctions;
- The 2023 budget, which must balance managing the energy crisis, the economic slowdown, and the increase in borrowing costs following the ECB’s monetary policy tightening. It is encouraging that Meloni has maintained the constant dialogue with the Draghi government, which has already started the 2023 budget process, and has awareness of the need to act in continuity with the outgoing government.
Recent events in the UK offer Italian would-be Prime Minister Meloni a useful lesson: the markets will punish policies that undermine the reduction of public debt. To establish its credibility, it is important that the new cabinet includes individuals with high international standing and that it adopts policies in continuity with the outgoing Draghi government both on fiscal policy and on sanctions against Russia.
Download the full edition of our Infocus publication here.