Melony channels have inner truss with Gamble Market

Suspension

Mario Draghi’s reign as prime minister of Italy is over, and the era of far-right leader Giorgia Meloni begins. Investors should hope that Italy’s first female prime minister will stick to her word and continue Draghi’s pro-European, pro-Ukrainian, and pro-Atlantic stances — not to mention his market-oriented economic policies.

The Meloni government’s first actions drew a line in the past. The right-wing majority voted for Ignacio La Rosa, the leader of the Italian neo-fascist youth movement, to be the leader of the Senate. The new speaker of the House of Representatives, Lorenzo Fontana, a member of the League of European Skeptics, has publicly expressed his admiration for Vladimir Putin, adding to his credentials as a radical Catholic, anti-abortion, anti-LGBT speaker.

Likewise, Meloni’s first international tour has broadened the spirit of animosity with the EU’s traditional partners (countries that keep their government afloat). Meloni took time away from Internal Affairs to speak via video link at a rally for Spain’s far-right Vox party, declaring “Long live Europe for the Patriots!” Other speakers include Donald Trump and Viktor Orban.

The closer Franco-Italian relations that Draghi and French President Emmanuel Macron fostered also appear to have become part of history. Meloni has been at loggerheads with France’s European Affairs Minister Laurence Boone – who has warned that France will monitor respect for the rule of law under her own government – asking President Sergio Mattarella to intervene to restore diplomatic calm.

This might be all red meat for a meloni base. I’ve spoken to many politicians from the left and right and those close to Draghi who argue this. Trained by Draghi, Meloni pledged to be pro-European and pro-Ukrainian, upholding her predecessor’s values. There is not as much margin for error – whether by its new coalition or investors – as Britain’s political and economic firestorms suggest.

Italy’s sovereign debt burden accounts for more than 150% of its GDP, compared to nearly 100% in the UK. The International Monetary Fund also warned last week that it was heading into a recession next year. The spread on Italian government bonds to German bonds widened to around 240 basis points. A jump of about 100 basis points at the start of the year raises refinancing costs and threatens the survival of many small and medium-sized businesses that rely mostly on short-term bank loans. They also, of course, face high energy costs from Putin’s war.

Divisions are already emerging in the right-wing coalition. Silvio Berlusconi, 86, was caught on camera on the first day of the new parliamentary term writing a note that described Meloni as “determined, tyrannical, arrogant and insulting”. Meloni later told reporters that the disgraced former prime minister had forgotten one thing: “I will not be blackmailed.”

What’s more, Meloni will likely disappoint her hopes of appointing a firm, apolitical hand to the Treasury. The new Italian Finance Minister is widely referred to in the media as Matteo Salvini’s deputy in the League, Giancarlo Giorgetti. This indicates not only political but economic change as well. Alberto Gallo, chief investment officer and co-founder of London-based Andromeda Capital Management Ltd., sees Italy, along with other countries in Europe, moving from a reform agenda espoused by leaders like Draghi to a greater focus on state capitalism. “This process will put pressure on Italian debt,” Gallo says.

Members of the right-wing coalition have pledged to fully re-nationalize long-troubled bank Monte dei Paschi di Siena and the indebted former Telecom Italia responsible for Italy’s overdue broadband coverage, and block the sale of national airline ITA Airways to a private equity group. Sirtaris.

Perhaps Salvini will reject his demands for big tax cuts and financial generosity. Salvini pushed to expand the flat tax system for the self-employed, enabling those with gross earnings of up to 100,000 euros (US$98,450) to pay as little as 15%. According to Oxford Economics, stimulus to the right could add about 1.6 percentage points to GDP growth next year. This increase would push inflation higher and increase the budget deficit.

Either way, there isn’t much room for experiment. UK Prime Minister Liz Truss got her job less than three weeks before Meloni’s victory, and she has already lost her chief financial officer and market credibility. Next could be her job well. This is hardly a promising model for Meloni.

More from Bloomberg Opinion:

• Italy may find November to be the harshest month: Marcus Ashworth

• Italy’s right wing scares less UK markets: Lionel Laurent

• Meloni will continue to compete with Salvini. Just wait: Maria Tadeo

This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

More stories like this are available at bloomberg.com/opinion

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