Italy will go to the polls on September 25 amid the painful energy crisis. The political landscape of the EU’s third-largest economy is notoriously volatile and it could enter a new era of uncertainty in the coming months as the far right is largely set to come to power for the first time after a century. The winning alliance, however, could have its hands tied in delivering an ambitious fiscal plan, keeping debt risks in the shadows, at least in the short term.

Right-wing parties lead polls

The appointment of the popular and former ECB President Mario Draghi as the new Italian Prime Minister has created a sense of political stability in 2020. It’s true, in Italy it is not strange to elect a Prime Minister who is not the leader of a party or a member of parliament.

Leading a three-party coalition made up of the center-right Forza Italia, the far-right League and the populist Five Star movement, the technocratic guardian “super Mario” has managed to obtain the largest share of the recovery fund of the EU of around 200 billion euros. during the pandemic.

But like so many before, he couldn’t hold on to his crown for long despite international respect for him. Soaring consumer prices after the war in Ukraine saw unity within the coalition crumble, with the Five Star Movement opposing Draghi’s generous economic package and then snubbing him in a no-confidence vote with the other members of the coalition.

Georgia Meloni, leader of the far-right and national-conservative Brothers of Italy party, is now the favorite candidate to replace Draghi and govern the country with Berlusconi’s Forza Italia and Salvini’s Radical League. Well, the truth is that despite his 20 years of experience in politics, his party, which is a post-war predecessor of the neo-fascist Social Movement, only managed to boost its appeal after 2018, passing 4.0% of the votes at the top. the Democratic Party at 25% according to the polls. Moreover, his coalition would not have succeeded in raising its popularity to 48% of the vote if the centre-left had not been fragmented in the first place.

National conservatism

The rise of the far right has been seen as a threat to the European Union for some time, especially after migration flows began to intensify a decade ago. Meloni is well known for her national and Eurosceptic ideologies, and although she has distanced herself from neo-fascism, her slogan “Less Europe, but a better Europe” as well as her close relationship with the Hungarian nationalist leader fuel quite a few concern about renewed political tensions within the EU.

In particular, investors fear that Meloni and his partners will jeopardize the conditions that Italy has pledged to respect under the recovery fund after claiming that the plan targets areas in which Italy is not. competitive. She then tried to calm those concerns, expressing her support for European policies, although she will also have to rally her coalition partners to be more convincing. Recall that Salvini also attacked the agreement, citing the risks that the reforms under the agreement could entail on pensions and social protection. His shaky relationship with Meloni is already putting the future of the coalition in question, but he will likely prioritize an election victory for now, throwing his support into parliament with Berlusconi.

Note that a referendum in 2020 reduced the size of Parliament by a third to 400 House Deputies from 630 previously and 200 Senators from 315 previously. In addition, approximately 36% of MPs will be elected in a first-past-the-post system, where a single MP will represent each party in a region. Therefore, there is a risk that voters will switch either to a candidate they don’t like or to a party they don’t support, and this risk is greater for parties that don’t have a vote. previous experience in government unless they create an alliance. .

Fiscal budget could rekindle debt crisis fears

Apart from support for NATO and Ukraine, the new fiscal budget could be another controversial topic, but it won’t be the first time. Being new to the role, Meloni is likely to commit to spending big on the domestic market in order to win the public’s trust at a time when the energy crisis promises a tough winter. But searching for funding channels could be a complicated task.

It is clear that the EU recovery fund will not be used to offset energy bills. The ECB also cannot be guaranteed as a buyer of bonds after the end of its 1.7 billion euro pandemic program and its main asset purchase program of 3, 3 billion euros, except in the event of a real risk of insolvency. Memories of the 2011 debt crisis, when the same coalition was in power, may also drain liquidity in Italian bond markets for longer, while relying on economic growth will not be a wise thing to do given the growing risks of recession in a country whose debt is the second highest in the EU.

As a result, with rising interest rates widening the spread between Italian and German 10-year bond yields, making borrowing more costly for indebted Italy, the new prime minister may have limited options to fund any cuts. significant tax cuts and any welfare reform.

The above suggests she is likely to abide by EU budget rules – at least initially – and pressure the union for more funding only if her party’s popularity is damaged. Perhaps if the far right also gains power in other EU member states, it might have some support.

Internally, certain dramas cannot be ruled out within the political elite if the alliance demands a change in the method of electing the president.


With regard to the foreign exchange markets, a dominance of the right is considered negative for the unity of the euro zone and therefore for the euro. However, the murky economic and geopolitical circumstances in the region currently leave little room for rebellions in Italy, as all attention remains on how EU member states will secure sufficient energy supplies for the months to come. This goes some way to explaining the Euro’s neutral reaction to Meloni’s growing chances of victory, while predicting that tensions will be subdued and non-disruptive for the currency at least as long as public finances are manageable.

From a technical standpoint, the euro/dollar will need to stage a sustainable move above the declining channel at 1.0192 to boost buyer confidence and shift focus to the August high of 1.0367 . If the pair makes a higher high above, violating the negative market trend, the bullish wave could gain another leg up to 1.0600.

Should price enter a new down cycle within the channel, some consolidation could begin around 1.0012 before the crucial support line, which connects the August 2018 lows, returns to the spotlight around 0, 9885. Failure to pivot here could print a new low somewhere between the 0.9775 and 0.9700 levels. If the selling pressures intensify, the next stop could be around the lower boundary of the channel at 0.9550.