Coalition chaos looms large for Italians with new populist government

In Italy this week bond markets have sold off heavily as investors brace themselves for being governed by a bizarre and unexpected alliance of the anti-establishment Five Star Movement and the far-right Lega Nord.

The coalition partners are poles apart in most respects, but come together over immigration, disdain for politics and dislike of the EU.

Together they have proposed a relatively unknown academic and political novice, Giuseppe Conte as prime minister – something that was met with bemusement in Brussels and by investors.

Fitch, the ratings agency, warned that the incoming populist government could pose a risk to Italy’s credit profile, and there was heavy trading in equity and bond markets amid questions about the groups’ eurosceptic policies.

If the new Italian government followed through on plans for a 100bn euro financial stimulus without describing how they intend to pay for it, Rome would have to ask for more flexibility from EU eurozone rules.

Very soon the EU could be at loggerheads with another major EU nation.

The coalition’s programme has been watered down since the March 
elections but still looks maverick when it comes to economic and fiscal policies.

It includes plans for a flat rate of income tax and a universal basic income – an idea that was recently abandoned after a pilot by Finland.

The coalition is also proposing a flat 15% tax on businesses, as well as hardline policies against illegal immigrants.

Investors are likely to continue to be wary as Italy inches its way towards government by a populist coalition.

Meanwhile, the UK’s decision to opt for Brexit has been blamed for a dramatic fall in the number of French, Dutch 
and Belgian businesses registering in the UK.

Figures from Companies House show that French companies registered 48% fewer businesses in the UK in 2016-17 than the previous financial year while companies in Belgium registered 38% fewer. Companies in the Netherlands registered 52% fewer companies last year than in 2015-16.

It’s not only company registrations that are down. OECD figures show that foreign direct investment into the UK tumbled in 2017 by 90%, after a bumper year in 2016.

The manufacturers’ organisation, the EEF, has also warned that Brexit is leading to lower applications for jobs in its sector and has said that 13% of manufacturers reported an increase of EU workers leaving their jobs. Many of those workers are permanently returning to the EU, leaving companies short of skilled workers.

Anecdotal evidence from the housing market in parts of London also suggests the demand for corporate lets – for example for overseas workers coming to work in the UK – are down sharply, making it difficult for some landlords of more expensive homes to find tenants.

Under questioning from the Treasury Select Committee this week, Bank of England governor Mark Carney said Brexit meant real household incomes are about £900 lower than forecast in May 2016, ‘which is a lot of money’.

Gertjan Vlieghe, one of the Bank’s monetary policy committee’s external members, called the ‘dampening effect’ on the UK economy of the Brexit vote one of the two big themes of his first three years on the committee.

On Brexit he admitted that there was ‘much less of a response than we thought’ in the immediate aftermath of the referendum in 2016. However, a 
’clear effect’ can now be seen, he told MPs.

Brexit has damaged the UK economy. Our decision to leave without a plan gave the EU negotiators the upper hand and they have played it deftly. The chances are that Italy’s new government will fall apart before it gets to a drastic alteration of its relationship with the EU.

Unfortunately the prospect of another state showing its disdain for the European project might harden EU negotiators 
in their stance towards the UK at this crucial time.