Following the defenestration of Mario Draghi by some of the populists who made up his ruling coalition, Italians have voted, to give a collection of right wing parties, led by Giorgia Meloni and her Fratelli d’Italia party, 43% of the vote so far (on very low turnout), which should enable them to form a government – though importantly – these parties are not yet a cohesive group.

Whilst there is some comfort in the fact that the likes of Five Star have lost votes – they and the Lega have suffered by association with the Draghi government – Fratelli have gained a lot of ground and are now the largest party with 25% of the vote, a number of old and new concerns around Italy will arise.

Old worries

The first, old one, is that a new government, absent the credibility of Draghi, will erode market confidence and will renege on the conditionality of EU financial disbursements to Italy. Italian government bonds have already pushed to high levels (well above 4%), and arguably Italy still looks like a model of fiscal rectitude compared to the Truss government in the UK (gilt yields have exploded and sterling collapsed), and Meloni has made public acknowledgement that she is not, in simple terms, going to pick a fight with Brussels. There is also the possibility that she chooses a reasonably respected technocrat as finance minister.

A new worry however, is that Meloni – whom Americans should read in the same political light as the likes of Mike Pompeo and Steve Bannon, will spend her time and political capital talking about ‘traditional’ values – essentially anti-LGBT, anti-immigrant and ironically for a country with the lowest fertility rate in Europe, pro-family. This line of argument has potential to cause a clash with Brussels.

More worrying from a geopolitical point of view, Meloni’s new government, once formed, will most likely result in the relegation of Italy as a diplomatic player – something Draghi championed – and give rise to concerns that it will ‘break the line’ in terms of the tough line on Russia.

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Whilst Meloni has again publicly pledged not to do so, there is plenty of cause for concern that Silvio Berlusconi (godfather of the Forza Italia party) is a close, sympathizer of Vladimir Putin, and in particular that Matteo Salvini – the leader of Lega party is a beneficiary of Russian largesse and under the influence of Moscow. In that respect, the new Meloni government will have to be judged by its actions than words.

What’s next?

From this point onwards, attention will focus on the process of forming a government, and here there are perhaps three broad scenarios to keep in mind.

  • Stalemate– While the Democratic Party and the centre have not performed, the cohesiveness of the right is not a given and it may take some time for a government to be formed, especially given strong personalities and a lack of clear policies across the right. This government may not endure and elections in 2023 could be likely. Market volatility persists but no crash.
  • Italian Values– Our central scenario is that the right-wing parties, led by Fratelli, gain enough votes to form a government. Once she has maneuvered around Berlusconi, Meloni leads a new government with a technocrat finance minister. She sticks to the NATO line on Ukraine and does not contest the conditionality imposed by Brussels on Italy’s finances, but rather continues to ‘campaign’ on ‘values’, to the detriment of a more open society. Immigration becomes a prominent issue. Market positive.
  • Rupture– a lower probability scenario is where the right-wing parties come to power and display the luridness many of them are associated with – especially Salvini on Ukraine/Russia, Meloni on Europe and Berlusconi on governance. Brussels and bond markets lose confidence.

The middle scenario is the most likely one at this stage. What is unfortunately certain, in the context of rising rates and greater market volatility, is that the Draghi era is over – his departure is a negative and a reminder that Italian politics is in thrall to populism. The reform agenda is dead now and serial economic underperformance is the norm.

More broadly, across the EU, the centre still holds, and at this stage it is unlikely that we see a widespread rise in the populism associated with the parties in the new Italian government.

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