Italy: A Right-Wing Government Will Not Alter Significantly Italy's Economic Fundamentals



Italy (rated BBB (high), Stable, by DBRS Morningstar) has held national elections. As expected, the right-wing coalition, comprising Brothers of Italy (BoI), Lega, Forza Italia (Fi) and Noi Moderati secured a majority in both chambers according to preliminary projections. Unless some initial disagreements occur among parties of the coalition, BoI, which obtained the largest share of votes (26%) led by Mrs. Meloni, is expected to head the government while Lega, FI and Noi Moderati will be junior coalition partners.

It will be the first time for BoI to lead a government and subsequently there is a certain degree of uncertainty over the new government's policies. The new government will likely be less reformist and more protectionist than Draghi's government, but we do not project a complete derailing of the reform agenda nor a dramatic change in the overall fiscal strategy. The likely BoI-led government is expected to implement policies which will not alter significantly Italy's economic fundamentals.

On the other hand, the prospects for a significant improvement, in the fiscal accounts and in Italy's competitiveness, seem weak. In DBRS Morningstar's view, the Next Generation EU (NGEU) as well as market discipline mitigate the risk of a confrontational relationship with the European Union (EU). However, we expect a government not so keen on further EU integration, but one willing to maintain a constructive approach with the EU authorities, including support for Ukraine and for sanctions against Russia.

Key Highlights
• Despite the uncertainty, the new government is not expected to alter significantly Italy's fundamentals.
• The NGEU, TPI and market discipline mitigate the risk of a significant derailing in fiscal strategy.
• The new government will be less reformist and more protectionist, which could weigh on foreign business investment in Italy.

"The outcome of the Italian election has been broadly in line with expectations, although Lega seems to have obtained less votes than anticipated and this does not bode well for government stability as time goes by,” said Carlo Capuano, Senior Vice President at DBRS Morningstar. “The next government’s relationship with the EU and fiscal prudence is important. The decision on who to propose as Minister of Finance and as Minister of Foreign Affairs is key in this regard."