Clock ticking for European Union
March 5, 2018

John J Hardy, Head of foreign exchange strategy at Saxo Bank, puts the results of yesterday's election in Italy under the microscope.

The headlines from the Italian election suggest that the inconclusive results from the Italian election are no major surprise and will likely lead to a long period of coalition negotiations and an extension of the general status quo of a dysfunctional Italian political scene. But I believe that the result is rather more dramatic than the immediate spin suggests. The votes garnered by the populist parties were beyond the extreme end of recent polling projections, as the Five Star Movement appears to have reaped a larger vote than was generally expected (over 30 percent vs. 27-28 percent expected), and perhaps most important, on the political right, the anti-immigration and Eurosceptic Northern League achieved a far stronger result (approximately 18 percent) than Berlusconi's more centrist Forza Italy.  

Sure, this may bog down for a long time before we see some form of government take shape, and as many point out, there is no actual time requirement for the formation of a new government – could the caretaker Gentiloni stay in place for the duration? It is inconceivable that that majority in the two houses of Italian parliament would ever approve a right-wing minority coalition led by the Northern League firebrand Salvini. So, while the political situation in Italy may be a back-burner issue of an EU existential threat, the long-term heat has been turned up dramatically in the wake of this election result. Keep in mind that this is an election outcome that arrives when Italy is doing as well as it ever has since the global financial crisis – imagine if this election had arrived during a raging recession.

Clearly, the EU has its work cut out for it, and the survival of the Germany (not-so-) grand coalition after the SPD vote this weekend is the first major step towards eventual attempts to reassemble the European Union project in a way that it can survive the inevitable next recession. Can the centre hold? It will be a very long time before we know, and without immediate pressure on sovereign spreads, etc., as was the case during the 2010-12 EU sovereign debt crisis, the sense of urgency may be lacking. Especially now that major election risks are no longer present. In short, this is a very long-term issue and the market doesn't possess the requisite attention span, so immediate worries may fade fairly quickly.





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John J Hardy, Head of foreign exchange strategy at Saxo Bank, puts the results of yesterday's election in Italy under the microscope.

The headlines from the Italian election suggest that the inconclusive results from the Italian election are no major surprise and will likely lead to a long period of coalition negotiations and an extension of the general status quo of a dysfunctional Italian political scene. But I believe that the result is rather more dramatic than the immediate spin suggests. The votes garnered by the populist parties were beyond the extreme end of recent polling projections, as the Five Star Movement appears to have reaped a larger vote than was generally expected (over 30 percent vs. 27-28 percent expected), and perhaps most important, on the political right, the anti-immigration and Eurosceptic Northern League achieved a far stronger result (approximately 18 percent) than Berlusconi's more centrist Forza Italy.  

Sure, this may bog down for a long time before we see some form of government take shape, and as many point out, there is no actual time requirement for the formation of a new government – could the caretaker Gentiloni stay in place for the duration? It is inconceivable that that majority in the two houses of Italian parliament would ever approve a right-wing minority coalition led by the Northern League firebrand Salvini. So, while the political situation in Italy may be a back-burner issue of an EU existential threat, the long-term heat has been turned up dramatically in the wake of this election result. Keep in mind that this is an election outcome that arrives when Italy is doing as well as it ever has since the global financial crisis – imagine if this election had arrived during a raging recession.

Clearly, the EU has its work cut out for it, and the survival of the Germany (not-so-) grand coalition after the SPD vote this weekend is the first major step towards eventual attempts to reassemble the European Union project in a way that it can survive the inevitable next recession. Can the centre hold? It will be a very long time before we know, and without immediate pressure on sovereign spreads, etc., as was the case during the 2010-12 EU sovereign debt crisis, the sense of urgency may be lacking. Especially now that major election risks are no longer present. In short, this is a very long-term issue and the market doesn't possess the requisite attention span, so immediate worries may fade fairly quickly.



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