Lazard Frères Gestion comments on italian elections

As the Five Stars Movement has shelved its plan for a Referendum about the euro membership, markets have relaxed about the Italian elections with spreads against Germany still close to two-year lows.

The most likely scenario is one of an inconclusive election, followed by weeks of negotiations and a coalition government. Investors are fully expecting such a scenario. Even the Five Stars Movement has recently talked about offering government contract to other parties.

This political uncertainty might not matter a lot in the short run as economic conditions are supportive, but it could come back with a vengeance later. Italy remains a country with weak potential growth, due to a lack of productivity growth and a big public debt.

The real issue is whether the next government will implement reforms to improve the country’s structural growth outlook.

Julien-Pierre Nouen – Chief Economic Strategist – Lazard Frères Gestion