Italy political crisis leads to market sell-off: Here’s what is happening Recent developments in Italy have led to nervousness in European and global markets. President Mattarella has appointed a stop-gap Prime Minister before re-election in July.

Moneycontrol News @moneycontrolcom

The possibility of fresh general election and Eurosceptic political parties strengthening their vote share has raised concerns about stability in the Eurozone.The Dow Jones index shed 1.6 percent Tuesday while the S&P 500 lost 1.2 percent. Earlier in the day, Italy's FTSE MIB index closed down 2.7 percent while other major exchanges in Europe shed more than one percent.Italy is Eurozone’s third-largest economy and has been weak for several years. The country’s debt currently stands at 130 percent of its economic output. The recent developments have led to nervousness in the European and global markets.

Why did this happen?

The markets reacted to the ongoing political instability in the world’s eighth largest economy by nominal Gross Domestic Product (GDP).On March 4, Italians voted in the general election. Voters elected 630 members of the Chamber of Deputies and 315 elective members of the Senate of the Republic.The centre-right alliance emerged as the largest political force with a large number of seats in both houses of the parliament.

The anti-establishment Five Star Movement finished with the second largest number of seats and higher vote share while the incumbent centre-left coalition, led by former Prime Minister Matteo Renzi, finished third.No political party or alliance was able to win a simple majority which resulted in a hung assembly. The political parties have failed to come together since the result was declared leading to a standoff.Such political uncertainty is not new for Italy. The country has seen 64 governments since World War II (WW2). What is new, however, is the scale of the standoff.It is also because populists have won an unprecedented percentage of votes for the first time since WW2.

Recent developments

The Five Star Movement (M5S) and the centre-right party League then came together and tried to form the government. The coalition forwarded Paolo Savona for the position of the finance minister.However, President Mattarella rejected the nomination of Savona to become the finance minister as he was a Eurosceptic.

Mattarella said appointing Savona, who had called Italy’s entry into the euro a “historic mistake”, would have risked confidence of foreign investors and would have de-stabilised the country. Savona had advocated a "Plan B" for Italy to exit the Eurozone.According to the Italian constitution, the President has the power to nominate the head of government and ministers.M5S leader Luigi Di Maio has called for President Mattarella to be impeached suggesting that Germany was behind the Mattarella's veto and that Italy was not a "colony", reports suggest.

Stop-gap government

President Sergio Mattarella on Monday installed Carlo Cottarelli as the interim Prime Minister to lead a new government until fresh elections are held. Cottarelli is a former International Monetary Fund (IMF) official.Cottarelli’s term is likely to end early as he is unlikely to prove majority in a parliamentary vote of confidence. The stop-gap government however has failed to secure support from major political parties. The country may now hold a re-election as early as July, according to reports.

First Published on May 30, 2018 10:07 am