Italy: Political challenges ahead – HSBC

Fabio Balboni, European Economist at HSBC, suggests that two years of relative political stability in Italy show it has fared better than other periphery countries, at least judging by the yields on Italian bonds.

Key Quotes

“However, that may be about to change. Euro-sceptic parties Five Star Movement and Northern League have been gaining ground in the polls, and municipal elections in Rome and Milan in May (and other major cities) could be a difficult test for Prime Minister Matteo Renzi. Mr Renzi's is also facing challenges from within his party on some reforms. A poor result could undermine his position further, and make further reforms more difficult to implement.

In October, the referendum on constitutional reform to limit the role of the upper house (Senato) could well turn into a vote on Mr Renzi himself, given he has said he would resign if there is a 'no' vote. This would mean early elections.

Also in October, Italy has to submit its 2017 budget to the European Commission, and Italy is far from meeting EU deficit targets. If Brussels were to request more austerity this could play against Mr Renzi, further boosting anti-euro sentiment among the population and increasing the prospect of a 'no' vote in the referendum.”