Italy’s League party tabled a motion of no confidence in Prime Minister Giuseppe Conte on Friday, initiating a new phase of political risk weighing on the Italian economy.
However, the news triggered a 25bp surge in the cost of Italy’s 10-year bonds to 1.776%, that is, the biggest one-day jump since the coalition government was formed in May 2018. The Milan stock exchange was 2.48% down on Friday. with around €15bn capitalization going up in smoke.
The relationship between the Italian coalition governing parties has become increasingly tense in recent weeks. The Lega is demanding greater autonomy for northern Italian regions, justice reforms, the construction of a high-speed rail line to France, and tax cuts.
Prime Minister Conte is accusing Salvini of using policy pretexts to capitalise on the League’s poll lead. The League currently polls 36%-to-38%. If the League passed the 40% threshold, it would receive bonus seats in parliament that would allow the party to form a government without a coalition partner.
Despite increasing political volatility, sovereign debt rating agency Fitch affirmed Italy’s credit rating unchanged at BBB on Friday, maintaining its negative outlook. This is only two steps away from junk status but provides Italy with some room for manoeuvre.
If the Italian government did collapse, President Sergio Mattarella could explore the formation of an alternative government before calling for new elections. However, this seems politically unlikely and all parties have informally launched their electoral campaign.
The Interior Minister and leader of the League Party, Matteo Salvini, said on Friday that he has yet to decide on whether his League party will run alone or allied with other groups. The Leader of the Brothers of Italy party, Giorgia Meloni, called on Salvini to form an alliance with her, prior to the elections.
Clearly, Salvini wants Italy to go to the polls as soon as possible.
At the moment, the timing of the confidence vote in parliament is not clear as the parliament is in recess: the League wants a vote this week to push for elections as soon as October, that is, prior to submitting a budget.
Salvini is campaigning on a promise to cut taxes by €15bn, in addition to the €23bn in tax cuts promised by the current government. This policy is hard to square with demands by the European Commission for a 2020 budget deficit that will not go above 2% of GDP.
La Repubblica said on Saturday that Salvini is preparing to campaign on a Eurosceptic platform, threatening to pull Italy out of the single currency bloc if no budget compromise can be reached. Salvini dismissed the notion of Italy leaving the Euro as a “yet another Repubblica fantasy” while promising to hold a “constructive dialogue” with the European Commission.