Stratfor's 2018 Annual Forecast said that the Italian elections would be one of the main sources of risk for the eurozone. Stratfor forecasted that the vote would result in a fragmented parliament and that anti-establishment parties would be more likely to challenge the European Union's fiscal rules than their mainstream rivals. The results of the March 4 general elections are in line with these forecasts.
At the polls this weekend, Italian voters voiced their dissatisfaction with mainstream politics, exacerbating political uncertainty in the third-largest economy in the eurozone. In the March 4 general elections, the anti-establishment Five Star Movement obtained roughly 32 percent of the vote, followed by the center-left Democratic Party with around 19 percent, the anti-immigration Northern League with around 17 percent and the center-right Forza Italia with around 14 percent. The results make it clear that Italian voters are punishing traditional leaders while supporting their anti-establishment and Euroskeptic rivals.
Together, the Five Star Movement and the Northern League earned the support of roughly 50 percent of the electorate, while the Democratic Party and Forza Italia performed more poorly than expected. Many Italians' disenchantment with mainstream parties can be attributed to years of low economic growth, high unemployment, unpopular austerity measures and weak, ineffective governments. More recently, these concerns have been joined by fears about the impact of African immigrants.
The fragmented vote will translate to a similarly fragmented parliament. No single party earned enough support to govern alone, meaning coalition talks will dominate the political conversation in Italy for the next several weeks, if not months. After the new Italian Parliament's first session on March 23, Italian President Sergio Mattarella will begin consulting with the political parties to try to form a government, during which time Italy will be governed by a caretaker government. There are several possible party combinations that could come out of the negotiations, but almost any new Italian government will be forced to integrate the policies of anti-establishment parties into its agenda.
Of all the possible government alliances, EU institutions and financial markets are most at risk from any that involve both the Five Star Movement and the Northern League. Both parties have flirted with the idea of leaving the eurozone and have promised to renegotiate the European Union's fiscal rules. Realistically, Italy is unlikely to exit the eurozone anytime soon, and the two parties have recently toned down their criticism of the common currency. But a coalition between two Euroskeptic parties is likely to clash with Brussels and abandon Rome's current commitment to maintaining a balanced budget. This, in turn, would raise questions in financial markets about Italy's ability to keep its deficit under control and repay its massive debt.
Other, less risky potential outcomes include Italy adopting a minority government or a multi-party coalition joining together to support a consensus prime minister. There is no deadline for coalition talks, and Mattarella may let them go on for several months before he contemplates suspending the negotiations and calling for new elections. In the meantime, Italy's caretaker government will probably refrain from making any disruptive political decisions.
During the negotiation process, Italy's partners in the eurozone will be watching very closely. France and Germany are currently working on proposals to reform the eurozone. But uncertainty about Italy's future could force Paris and Berlin to postpone some crucial decisions as they wait to see who will be in charge of steering Italy into the future. Moreover, governments in northern Europe which are skeptical of plans to increase financial risk-sharing in the eurozone could use Italy's fragility as a pretext to water down or even put off the reforms.