The Italian elections debacle has taken another plot twist this week as President Mattarella refrained from giving his support for a coalition government between the Five Star Movement and La Lega, which last week looked highly likely to happen. Mattarella blocked finance minister Paolo Savona, the finance minister, from being a member of government due to his euro-sceptic views and, with both 5SM an L insisting on Savona’s inclusion in the coalition government, the formation has now collapsed.
There has been growing global pressure on Mattarella not to allow the formation of a government with an anti-EU message at its core. The two parties feel that the President’s change of heart came on the back of a warning by ratings agency Moody’s, who said that Italy risked a downgrade in the event of such a government being formed.
Technocratic Government in Doubt
Mattarella is now attempting to form a technocratic government to lead Italy until such time that fresh elections can be held, either later this year or in early 2019. The government is due to be led by Carlo Cottarelli, who is a former IMF official and adviser to the Letta government on reducing public spending, and would remain neutral in the term of his presidency. However, with current indications showing that none of the major parties are likely to give Mr Cottarelli a confidence vote in parliament, it seems that focus will remain on further elections.
Cottarelli announced that if his nomination were successful and his government obtained a confidence vote in parliament, its programme would include approval of the budget and also holding new elections in early 2019. However, Cottarelli announced that if his government lost the confidence vote, he would resign immediately and call for new elections to be held in August this year.
One of the tasks that a temporary government would be charged with is reforming electoral law to make it easier for to form majority governments. However, given the political deadlock currently, it seems unlikely that this will happen given that a technocratic government is unlikely to obtain parliamentary support.
What do the polls say?
The current polls have not changed drastically from the polling shown over the course of the election campaign except for the momentum that has built up in favour of La Lega, which has taken some support away from the other parties. The run up to further elections will likely take on a different context than the themes which dominated the March 4th elections with alliances, leaderships and motivations having all developed.
The reliability of the commitment to the Eurozone by parties such as 5SM and L as well as their fiscal priorities has clearly been undermined by recent developments. Indeed, there is still uncertainty about whether La Lega will confirm its role in the centre-right coalition or seek an alternative partnership with 5SM, which has been suggested by some press reports. There is now a lot of doubt as to whether the traditional parties can effectively re-launch a pro-Europe campaign in light of the momentum being gathered among the anti-Europe parties.
The sell-off in EURUSD over the last few weeks has sen price trading all the way back down to the November 2017 low where price is currently stalled. If price can build some support here and we get a rotation higher, there is the potential for a larger head and shoulders pattern to build with a potential right shoulder forming around the 1.2040 – 1.21 mark. If this formation does develop this would signal the potential for a much larger decline in EURUSD over the coming months so price action will be closely monitored now going forward.