Italy has been under the caretaker leadership of Paolo Gentiloni since December of 2016 — when Matteo Renzi resigned from the position after his proposals to reform the Italian Senate were not approved in a referendum.
There are deep concerns that increasing support for populist ideas will make Italy derail from a sustainable fiscal path in the coming years — a problem for its own finances but also for Europe.
“The election signals the return of serious political risk to the euro area’s third largest economy, which has a debt stock of around 2.3 trillion euros ($ 2.77 trillion) — by our estimate, 133 percent of gross domestic product (GDP) in 2017, and over 20 percent of the euro-area total,” Peter Ceretti, analyst at the Economist Intelligence Unit, told CNBC via email.
“The vote also comes at a time when the economy is gaining pace, but real GDP is still nearly 6 percent below its pre-crisis peak. The next government is unlikely to implement reforms that will raise productivity and potential growth,” he added.
Adding to the pile of problems is the European Central Bank’s plan to gradually reduce its stimulus, meaning that there could be an uptick in market volatility, making it more expensive for the Italian government to borrow from capital markets. Such a risk could spread to other euro zone countries, due to the interlinks between the 19-member economy.
Furthermore, if the outcome of the election produced a weak Italian government, unable to pass major legislation, current efforts from France and Germany to integrate the euro zone further could be at risk. Such integration would probably be at a slower pace or even blocked.
