Italy Heading For Hung Parliament As Populist Parties Make Big Gains

With votes still being counted, ex-Prime Minister Silvio Berlusconi's centre right coalition looks set to win the most seats in the lower house of parliament at around 248-268, but this is well below the 316 needed for a majority.

However, the Five Star Movement appears likely to be Italy's biggest single party, with 32% of the vote.

There was also a surge in support for the Northern League, led by  Matteo Salvini, which is on track to beat Forza Italia and gain 17% of the vote to become the main conservative party in Italy.

But the governing Democratic Party - headed by former prime minister Matteo Renzi - had a terrible night, with exit polls suggesting it won less than 20% of the vote.

The inconclusive result means forming a new government in Italy may now take weeks of talks and coalition building, while fresh elections cannot be ruled out.

However, there was better news for the stability of the EU last night as German Chancellor Angela Merkel is set to form her fourth government after the opposition Social Democrats (SPD) voted in favour of another grand coalition, ending months of political deadlock since last September's election.

The euro is likely to see a choppy day's trading as more results come in from the Italian election and eurosceptic parties gain further ground. It fell overnight against the dollar but regained some ground on the back of the resolution of Germany's coalition talks, to trade at $1.23 early this morning. 

Market complacency

Italy has been run by a caretaker cabinet since December 2016, when Renzi resigned after suffering a worse defeat than expected in the country's referendum on constitutional reform. 

Fund managers have said markets had been far too complacent in the run-up to the weekend's elections, warning the eurosceptic views of three of the four main parties could threaten the European Union in the long term.

Big issues debated during the election campaign included immigration, the economy (Europe's fourth largest) and the country's relationship with the European Union (EU).

In the build-up to the election, it was forecast the centre-right coalition would win with a slight majority. However, with Berlusconi unable to run due to a criminal conviction, it was believed European Parliament President Antonio Tajani could become Prime Minister.

In a pre-election poll conducted by Termometro Politico between 12 and 16 February, M5S had 26.6% of the vote, PD had 21.3%, Forza Italia had 15.9% and Lega was on 14.8%.

Political tail risk in Europe thins but still further to go