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Mario Draghi’s resignation has once again plunged the reputation of Italian politics into volatile waters. This time, however, the instability does not arise from the question of who will lead the country, but precisely because of the answer.

Draghi’s technocratic government lasted just two years. Italy has been overwhelmingly run by populist parties and this looks set to be the case once again. When Italians go to vote on September 25th, polls predict a clear right-wing coalition victory lead by far-right Brothers of Italy’s Giorgia Meloni, allied with Matteo Salvini’s the League and ex-Prime Minister Silvio Berlusconi’s Forza Italia. Brothers of Italy, which received 4% of the vote in the 2018 elections, is now consistently polling at around 25%, ahead of the left-wing Democratic Party’s 22%; the populist left-wing 5 Star Movement lead by Giuseppe Conte, the Prime Minister who preceded Draghi and instigated his resignation, ties with the League on 13%, whilst Forza Italia is neck and neck with the centrist coalition supporting Draghi’s return to PM between Matteo Renzi’s Azione and Carlo Calenda’s Italia Viva on 7%. 

Meloni’s strong position comes from the right-wing alliance that will translate into a governing coalition with Meloni at the top of the pecking order. This is in stark contrast with Italy’s left-wing, who have been unable to find unifying ground – in part as a consequence of Calenda’s refusal to work with the Greens and Left Party alliance, dropping out of a pact with the Democratic Party[1] – and thus leaving voters with no real opposition to the dominating right-wing bloc.

Brothers of Italy have been climbing in the polls ever since 2018 whilst the League, a party with almost identical fundamentals, has been falling at a corresponding rate. It looks like the decision by Salvini to join Draghi’s government has penalised the League, with voters preferring to veer even further away from the establishment. The 5 Star Movement, which was beginning to fall in the polls, has sharply increased following the dissolution of Parliament, as has the Azione and Viva Italia centrist coalition. The latter has been increasing whilst the Democratic Party steadily loses popularity, pointing to Calenda’s withdrawal of support from a potential left-wing bloc. Berlusconi’s Forza Italia is consistently bobbing around the 7% mark but, in the context of a wider right-wing coalition, that is by no means insignificant. 

Economic challenges

Italy faces a plethora of challenges that the future government will have to deal with. Of most concern to investors will be the classic Italian trifecta of doom: an aging population, persistent low growth and high debt. If polls are correct, these challenges are to be faced by a right-wing coalition whose leading party’s mantra is identity-led “God, country and family”[1] (a slogan coined by fascist Giovanni Giuriati in 1931[2]). 

  • “Country” is undoubtedly an Italy-first sentiment; Meloni has advocated for naval blockades[3] of North Africa to halt the flows of illegal immigrants and has morphed her previous stance of “Italexit” from the EU to one where she wants to defend Italy’s national interest against the overbearing powers of France and Germany.
  • “Family” is a nod to the issue of an aging population with policy proposals such as a taxation system accounting for the number of household members, but the larger focus has been on saying “no to the LGBT lobby” and “yes to natural families”. 
  • “God” is the glue that holds it all together 

These are policies that grate against the general direction of the EU with Brussels already concerned that Meloni’s closest European ally is Victor Orbàn. Brothers of Italy and the League Euro-deputies voting against the EU’s resolution that “Hungary is no longer a democracy”.[4] Meloni has also positioned herself as openly against the “climate fundamentalism of the Green New Deal”[5]. Instead, Meloni hopes to see growth through lowering taxes on labour and bonuses, such as broadening the range of goods with reduced VAT and zero taxes for the first three years for young people under 30 who set up their own businesses.[6]

Her opponent on the centre left, the leader of the Democratic Party Enrico Letta, also envisages lowering taxes on labour, but the similarities stop there. He makes it clear he wishes to be associated with the Draghi government and is looking for “more Europe, not less”[7]. He wholeheartedly supports the EU sanctions against Russia unlike Salvini, who recently criticised them[8]. Salvini and Berlusconi, Meloni’s coalition partners-to-be, have both shown themselves to hold uncomfortably close relations with Putin; this is one of the few electoral issues Draghi has openly condemned[9]. Meloni has used the campaign to distance herself from ties to Russia, instead facing across the Atlantic to the US. She told a business conference that “If Ukraine falls and the West perishes, the big winner will not be Putin's Russia, but Xi Jinping's China. And those who are weakest in the West, namely Europe, risk finding themselves under Chinese influence. So we have to fight this battle”[10]

Her lack of experience has led to accusations that she will rip up the carefully negotiated use of EU funds in the National Recovery and Resilience Facility[11]. Her opponents claim she will squander the opportunity through incompetence and attempts to renegotiate required reforms. 

Meloni will be Italy’s first female leader and she will hope her right-wing populist plans will deliver a similar revolution for the economy. But Brothers of Italy has a poor track record in its mayorship of Rome and with Berlusconi as a coalition bedfellow, investors will worry that Italy is taking a gamble too far. Political risk premium is back in the EU, driving Italy’s bond yields higher and wider from the EU core. 













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