‘Brexit’ fever: What the elections in Italy and Spain mean for the eurozone
European politics remain the hot topic of conversation for the markets, and the focus are its implications for the euro. Investors worry the euro’s future could be at stake due to changes in control in Italy and Spain. But, could the market be over analyzing these developments?
In Spain, the courts judged members of former Prime Minister Mariano Rajoy’s People’s Party guilty of benefiting from a kickbacks-for-contracts scheme. Several members received 38-year prison terms, leading Rajoy’s opponents to seek a no-confidence vote. Opposition Socialist-party leader Pedro Sanchez filed the measure and had enough support for the vote to pass. According to Spanish law, Sanchez will become the new Prime Minister.
What’s interesting is that the market has portrayed Sanchez as a euroskeptic, but reports indicate otherwise. He has never expressed a desire to break from the European Union or the euro. The confusion has to do with a potential alliance between Sanchez’s PSOE party and the ultra-left Podemos party and Catalan separatists. Both are skeptical of the euro and were trying to oust Rajoy at the same time. This seems to have drawn the broad swipe of Sanchez being anti-euro as well, but upheaval concerns should ease once Sanchez is firmly in office.
In Italy, recent elections failed to produce a majority ruling party. But Friday, Italy’s Prime Minister designate Carlo Cottarelli announced the formation of a government lead by the populist League and Five Star Movement parties. Italian news service Agenzia Nazionale Stampa Associata reported that Giuseppe Conte was sworn in as prime minister and would face a confidence vote today or tomorrow.
Currently, the League and the Five Star coalition hold a majority in the both the Italian Senate and the Chamber of Deputies. The Italian Constitution requires a secret ballot for the election of the president, and requires a two-thirds vote for passage in the first three rounds of voting. After that, it’s just a simple majority.
In this instance, the party taking power has euroskeptics as cabinet members, but their first attempt at forming a government failed… Past statements on the euro were the cause. This new attempt has the feel of a grand bargain. They replaced a euroskeptic candidate for Finance Minister and dropped the anti-euro Brothers of Italy party.
The formation of a new Italian government ends months of political uncertainty, but creates the possibility for further elections… Events that could increase the standing of the League and Five Star parties. That is something the broader eurozone would not like to see.
We highlight these elections because we think the market may be shooting first and asking questions later. Markets hate uncertainty. Expect a favorable market reaction if both scenarios can produce positive outcomes for the eurozone. Considering rising global trade tensions, the less uncertainty the better.