Markets are taken aback by the far-right leader’s impact in Italy

Italian Prime Minister Giorgia Meloni is making waves in her home country after successfully gaining support from her more moderate counterparts in Brussels.

On August 8, Italy’s announcement of a 40% windfall tax on banks caused a 2.7% drop in Europe’s main banking index. However, the unexpected move was softened within 24 hours.

Airlines have also resisted other policy measures, such as a plan to regulate prices for flights to certain destinations. The Italian government is scheduled to meet with airline executives next month, and the European Commission is already reviewing whether this measure complies with EU law.

Since her election in October, Giorgia Meloni, the country’s first female Prime Minister and the first from a far-right party since World War II, has mostly aligned with mainstream political positions both domestically and internationally. Despite concerns that she may push Italy towards the fringes, she has maintained a positive relationship with the European Union. Additionally, she has ensured that Italy remains a strong supporter of Ukraine following Russia’s invasion, despite some of her cabinet members having ties to the Kremlin.

Federico Santi, a senior analyst at consultancy Eurasia Group, described Meloni’s backtrack on the windfall tax as a significant mistake. He acknowledges that her government is primarily composed of right-wing populist parties with a history of erratic economic policy-making. However, Santi expects Meloni to remain consistent with the fundamental aspects of her government’s policies.

Erik Jones, a professor at the European University Institute, believes that the current government is not more “populist” compared to the previous year. He highlights that Meloni and her finance minister, Giancarlo Giorgetti, are making efforts to spend without accumulating large deficits.

Italy’s government debt-to-GDP ratio was 144.4% in 2022, according to the International Monetary Fund (IMF). It is projected to decrease to 140.5% this year and further to 138.8% in 2024. The IMF forecasts the Italian economy to grow by 1.1% this year and 0.9% in 2024, which is a decline from the 3.7% GDP growth registered in 2022.

While it is unlikely that the Italian government will pursue more controversial paths, analysts have identified two events that international investors should monitor closely. The upcoming budget is expected to be turbulent, potentially causing volatility in the market. However, it is unlikely that the basic policy will change or that the government will collapse, according to Erik Jones from the European University Institute. In the past, submitting budgetary plans for the new year has strained relations between Brussels and Rome.

Another concern for investors is the potential delay in receiving EU funds. These funds, agreed upon during the height of the Covid-19 pandemic, play a crucial role in supporting public investment and growth until 2026. Italy, having been severely impacted by the pandemic and subsequent lockdowns, is the largest beneficiary of the 750 billion euro program ($814 billion). However, disbursements are contingent on nations implementing certain measures and reforms. The substantial volume of funds could have a significant impact on Italy’s economy.

Federico Santi emphasizes that the delays are primarily caused by external factors such as high input costs, strains on supply chains, and administrative issues, rather than the government’s own actions. While Meloni is committed to meeting NextGenEU commitments on paper, these issues may increasingly hinder the government from achieving its investment targets.