Did Italy’s Five Star Movement Just Blink Or Are We Headed To New Elections?

Authored by Tom Luongo,

Italian coalition talks have reached the end of the road.  The latest news out of Italy has Five Star Movement (M5S) leader Luigi Di Maio willing to consider someone else as Prime Minister.

From Bloomberg (so salt to taste):

“I want to do a political government with the League based on some points,” Di Maio said Sunday in an interview on broadcaster RAI. “If Di Maio as premier is the obstacle,” then let’s choose together another prime minister, he said.

Di Maio, 31, is making a last bid to form a “political government” before President Sergio Mattarella begins a final round of meetings with the parties after an inconclusive general election in March.

There will be a meeting today (Monday, May 7th), to make one last push for a government.

The Bloomberg article is giving you the EU’s preferred outcome, a League-led government with Forza Italia over-represented giving their stalking horse Silvio Berlusconi a larger say than he warrants.

Shifting Poll Numbers

As always with U.S. media, the meat of the article it buried at the end, the latest poll numbers.

Polling group Youtrend compiled an average of voting intention surveys on May 3 which showed Five Star at 33.6 percent, compared with 32.7 percent in March elections. The League has gained 4 percentage points since the elections while Berlusconi’s Forza Italia has lost about 2 points.

I find it interesting that Di Maio would blink like this just a couple of days after saying that he and Five Star Movement would prefer a second round of elections in July.  Moreover, I find it disconcerting that Salvini would want to continue hitching his rising star to a falling one like Berlusconi’s.

It’s not likely that Di Maio is going to completely cave here unless there is other arm-twisting going on behind the scenes.  M5S is too strong a movement to be shut out of its own government.

So, the likely scenario for tomorrow is that talks go nowhere as Salvini tries to leverage the coalition’s strength versus M5S’s and Di Maio sticks to his guns.

Both should be willing to got back to the polls in July to see where their support truly lies.  A result similar to the quoted poll above would give an M5S/League alliance a solid majority in Italian parliament.  Seats they didn’t pick up in March should be in play, even given that 1/3 are chosen directly now.

The new election structure which allowed for coalitions to campaign together resulted in nearly the perfect situation for continued weak government in Italy which Brussels can abuse.

But, the problem has been Salvini and his firebrand, nee Trumpian, persona which has seen the League’s support double in the past six months.

Pride Goeth and All That…

I warned you we would get to this point last month, musing as to whether coalition talks have stalled because of League leader Matteo Salvini’s immense ego.

It is fairly obvious that Salvini is a little drunk on the power of his newfound status of coalition leader. He’s trying to milk it for whatever he can get from it. And that’s the real danger.

Salvini believes a re-vote is in The League’s favor.  But, I wouldn’t be so sure of that.

In response to talks breaking down, M5S Leader Luigi Di Maio made coalition overtures to the Democrats who promptly rejected him.  And that’s expected.  The establishment parties are beholden to Brussels in the end.  It is their job to deliver a result that aligns with further EU integration.

And his unwillingness to break up the coalition with Forza Italia or even completely sideline Berlusconi is all the proof you should need to conclude he’s not really willing to stand up to Brussels.

All that talk of “I’m a populist” and “The EU can go f$@k itself” may have simply been more smoke than fire.  We’ll see.

As I said in my previous article on the matter, Italians voted against the established parties for something new.  They didn’t vote for The League or Five Star Movement.

They voted for change.  It was a protest.  And the energy behind protests can be dissipated by the establishment by seducing the ‘new guys’ with power and back-room deals.

Salvini and Di Maio are both outsiders to Rome.  They represent a sea change in Italian politics.  And, as such, should see each other as natural partners not rivals for a job neither is actually qualified for at this point in time.

So, check the egos, have a constructive meeting and get a deal done that puts both parties on strong footing.  Salvini has to give up his alliance with Berlusconi who hates what Five Star represents and Di Maio should give up being Prime Minister if that’s the only way Salvini’s ego can be salved.

If they don’t, they will be headed back to the polls.  And it’s there that things make even more sense for the two to put their differences aside and form a working coalition that stands up to Brussels and, more importantly, Berlin.

Market Outcomes

The most likely outcome from tomorrow’s meeting will be more of the same.  If Di Maio caves completely then Brussels will be able to mute any reforms Salvini introduces and allow Berlin to play serious hard-ball on debt relief/restructuring which Italy desperately needs.

The euro will bounce on that news and bond yields across the euro-zone will fall, if only for a little while.  The dollar is beginning its next leg higher which will put upward pressure on rates across the board as dollar-denominated debt service puts trillions at risk.

But, if Di Maio and Salvini don’t come to an arrangement then the market will be hostile to that and the opposite will occur, confirming nascent trend changes.

The euro is already flirting with a change in trend, below $1.20.  Italian 10-year debt has pulled back from the bear market brink but it trapped in a tight trading range near 1.80%.

The markets are holding their collective breaths waiting to see what transpires between a group of egotistical, hot-headed Italians.  It should, because anything is likely.**

** = It’s not racist to slam your own people’s shortcomings, folks.

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