Is Italy about to plunge the Eurozone into a fresh political crisis?

  • February 26, 2018

The Italian general election will be held on March 4th. It will be complicated, unpredictable, but most definitely interesting. Election results may have unexpected repercussions across the continent and in the currency markets. 

Here are “Five Numbers that Matter” related to the election:

  • 36 -- Italy's next Prime Minister will be appointed by the President based on the election’s results. Recent opinion polls show that a center-right coalition of parties will garner 36%1 of the votes, significantly higher than a center-left coalition at 28% and the Five Star Movement at 27%. Worth noting: I think the chances that the anti-establishment, anti-euro Five Star Movement (M5S) party enters government as part of a coalition are greater than currently perceived; such an event would certainly shake-up the EU and the euro in a negative way.
  • 40 -- New, untested and relatively complex voting rules* require the next Italian government to win about 40%2 of the vote to achieve a “working majority.” If the center-right coalition gains only 36% of the vote, the result might be political deadlock. If that happens, Italy’s President Sergio Mattarella must choose from three options: install a temporary technocrat government (leaders to be chosen based on technical expertise and background), try to create a grand coalition of the main center-left and center-right parties, or call a new election.
  • 35 -- A recent survey showed that 35%3 of Italy’s voters remain undecided, with widely disparate views on the country’s relationship with the European Union, taxes, and immigration. Social angst among Italians remains high, as Italy’s GDP growth rate (1.5%) is the lowest of the entire euro area, it’s unemployment rate (11.7%) the highest after Greece and Spain, and its massive public debt ($2.8 trillion) among the highest in the world (133% of GDP). Not to mention Italian banks with $220 billion4 in bad loans.
  • 9.3 -- EURUSD options that provide downside protection and expire just after the election are being bid higher, but are still relatively cheap. 1-wk options at 9.3%5 are in the middle of the pack of similar options in the other major currency pairs. Big currency traders remain largely unmoved, and are positioned net long EURO; in fact, more so than at any time over the last 10 years.
  • 65 -- Ever since Italy set itself up as a republic in 1946, it has churned through governments – 656 new governments over those 72 years. A “working majority” is needed to rule in Italy, and in a system filled with small parties, it is hard to do. Oftentimes, a small party will fall out with its coalition partners, bringing down the government.








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