After new government was formed in Italy, markets seemed placated for a time
The new government was expected to be more fiscally disciplined than its predecessor. However, Italy’s political scene has been very unstable since WW2. Analysts expected that voters would punish the populist League’s leader Mateo Salvini for his clumsy attempt to cause an early election.
The opposite has happened. In the local election in the region of Umbria, which has been ruled by leftist politicians since WW2, League and its allies scored a decisive victory against the joint candidate of the ruling coalition.
Markets reacted as expected, governmental bond yields rose fairly rapidly. Investors will also not be reassured by the fact that some officials in both parties have already started blaming their coalition partners for this result.
Why is Salvini spooking the markets so much? It is a combination of two factors. His economic policy can be described as lowering taxes and increasing spending, which the already indebted Italy can hardly afford. Also his recurring fights with European commission are viewed very unfavourably by most investors.