Except for a possible, yet another, deadly blunder by pollsters, political scientists, journalists, commentators and analysts of all backgrounds and factions, the most probable result of the vote on March 4th for the renewal of the Chamber and Senate - and, therefore, of the Italian government – the substantial tie appears: no one between the centre-right, the centre-left and the Movimento 5 Stelle should be able to govern except with a coalition of broad understandings.
Calm and chalk on the markets
It is not the first time that Italy has found itself in a situation of uncertainty (and it probably won't be the last), but pace of the president of the European Commission Jean-Claude Juncker, who has invited everyone to prepare "to the worst case scenario, i.e. a non-operational government in Italy“, the markets do not seem particularly alarmed.
All the main systemic risk indicators tell us this, i.e. spreads, CDS and stock exchanges, summarized in our Risk Barometer: well, just a few days after the vote, these indicators remain at non-alarming levels (today it is 56, for Europe, and when the Barometer is above 50, systemic risk is normal).
There has indeed been an increase in spreads recently, but it did not depend on an increase in Italy risk: it was rather a repricing of overall bond risk. In essence, investors are not (yet) running away from the risk represented by our country.
The pause for reflection that won't last forever
When the economic machine restarts and there is the quantitative easing as a shield, politics can also take a "pause for reflection": Spain has been without a government for a year and is facing an unprecedented institutional crisis; in Germany, Merkel has not yet formed a government; in 2017 the Netherlands did not have a government for seven months. In all these cases, the economic machine has never stopped working and the markets have not failed to support them.
In this phase, Italy – like the rest of the countries of the euro area – can count on the strength of the international economic cycle and on the compression of interest rates. Just to give a few numbers, a good chunk of our future ability to stabilize (or bring down) the ratio between public debt and Gross Domestic Product largely depends on nominal GDP growth, the primary balance (difference between receipts and by the containment of interest expenditure.
The shield of the ECB, for now
Deficit budget maneuvers are being leveraged almost everywhere, and Italy is no exception. Almost all parties have very clear ideas on how to spend resources and much less on how to find them (in this regard we point out Roberto Perotti's book, "False!"). Under these conditions, the best we can expect for the next two years (2019-2020) is a stabilization of the debt/GDP ratio.
But this "magical fairy world" will not last forever: because the knots, when there are, sooner or later come home to roost. The boost to economic growth impressed by quantitative easingwill progressively decrease, together with the same quantitative easing. And as this happens, key variables such as productivity, employment, growth and public finances will once again become increasingly relevant.
In short, in the immediate future, politics can still count on the shield of the European Central Bank and on the strength of the global cycle. But time is running out and whoever has the responsibility to govern Italy will have to seriously ask themselves what to do next.
