Italy: Back to polls in Q4 2019?

Recent developments in Italy’s political landscape have increased the probability of early elections in Q4 2019, but the situation is not so straightforward.

Last week, political tensions in Italy intensified as Matteo Salvini, the League’s leader triggered a no confidence vote against Prime Minister Giuseppe Conte.

PM Conte will address the Senate on 20 August. A confidence vote will likely follow the speech, though further delays remain a possibility.

Once the government dissolves, the President of the Republic Sergio Mattarella will open a consultation period, from which point we see three potential scenarios: (i) a new majority with the current parliament’s arithmetic, (ii) a caretaker government is assembled with early elections in Q1 2020 or after and (iii) early elections in Q4.

The key issue is how political events would clash with budget deadlines.

The 2020 Italian budget is complicated by controversial VAT hikes that the Italian government is set to introduction to abide by the EU’s fiscal rules.

From a macroeconomic perspective, Italy’s growth outlook remains challenging. Like other economies, Italy faces a difficult external backdrop. We expect a meagre real GDP growth of 0.2% in 2019, with risks tilted to the downside.

From a market perspective, the main short-term question for BTPs will be who drafts the 2020 budget. The rhetoric ahead of a potential election would be key. Markets will remain sensitive to comments from the League regarding Europe, but also the idea of introducing a parallel currency.

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