Italian Elections 2018: 'The Country Is A Euro-killer'

Political risk in Europe fell away dramatically last year after Emmanuel Macron defeated National Front leader Marine Le Pen in May's French Presidential Elections and far-right Party for Freedom leader Geert Wilders failed to make any inroads in the Dutch elections.

Furthermore, German Chancellor Angela Merkel is expected to secure a coalition with the pro-European Union SPD party after her conservative alliance suffered its worst election performance since 1949, subject to a vote on the agreement on 4 March.

In Italy, four parties remain in contention of securing an election victory; the anti-establishment Five Star Movement (M5S), former Prime Minister Matteo Renzi's Democratic Party (PD), Silvio Berlusconi's Forza Italia and the right wing Lega Nord.

In a 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 Nord was on 14.8%.

However, the M5S has already said it will not form a coalition with any other party while Renzi and Berlusconi have both said they will have a repeat election rather than join forces in a grand coalition.

Italian markets have remained relatively resilient  in the run-up to the election, with the FTSE MIB rising 3.3% since the start of the year, while Germany's DAX and the Euro Stoxx 50 have fallen 3.6% and 2.2% respectively, to 20 February.

Furthermore, the euro remains strong against the dollar at $1.236 and yield spreads between Italian 10-year government bonds and German bunds narrowed to their lowest level since September 2016 at 1.209% on 7 February.

However, investors have displayed some concerns about the possible risks ahead, with Italian large-cap equity ETFs witnessing €344m of outflows so far this year, according to data from Lyxor ETFs.

Euro break-up risk

Neptune Investment Management's chief executive Robin Geffen and CIO James Dowey have flagged up the wider risks relating to the Italian election, due to the link between anti-systemic politics in Europe and the break-up of the euro.

Geffen warned an anti-systemic party within a coalition was high risk because during periods of no growth social cohesion is vital, something that an extreme party could not provide.

European politics: A distraction or disaster for markets?

Guy Monson, CIO at Sarasin and Partners, added the election could spark market volatility, as three of the four leading contenders for power are eurosceptic.

"There is the possibility of another euro-centric crisis," he said. "If we get through 4 March and there is a cosy coalition, we can put it to one side.

"But an attempted exit by a member of the euro would be of a magnitude greater than Brexit, as the UK was not a member of the currency union."