Populist movement makes inroads in Italian elections

Italy's main anti-establishment parties made new inroads in Sunday's parliamentary elections, possibly paving the way for already-approved economic reforms to be rolled back and higher spending.

The increased difficulty in crafting a stable government might even force the country into new elections, possibly in the second half of the year, analysts said.

As expected, the anti-establishment 5Star movement garnered the most votes, with roughly 32% of ballots cast in its favour.

Yet that was about five percentage points more than surveys of voters had indicated ahead of the elections and came alongside a strong showing for the anti-immigration Northern League, which obtained 19% of the votes, whereas the centre-left PD disappointed with just 20% of ballots.

5Stars had moderated its agenda in the run-up to the weekend vote, backing down from previous calls for a referendum on euro membership. Nonetheless, one of its key campaign planks remained the repeal of the pensions reforms approved in 2011 under Mario Monti.

Other key policy promises included the creation of a €780 per month basic salary for citizens and pushing for higher budget deficits.

The Lega meanwhile had pledged to implement a 15% flat tax on personal income and to expel all illegal immigrants.

According to analysts at Danske Bank, a grand coalition or centre-right coalition were still the most likely end game.

Nonetheless, the strong showing for the 5Star and Lega also left open the possibility that a Euro-sceptic coalition between those two parties might emerge, or that new elections would need to be called.

"Even in the case of a euro-sceptic coalition of Five Star and Northern League emerging, we still think that the actual euro exit risk is low.

"Such an outcome would still be the most adverse one for markets, given the combination of reform roll-back and significant fiscal easing, which could bring Italy's debt woes quickly back into focus," Danske Bank said.

"The risk that new elections may have to be called – probably after the summer break – is not negligible," chipped in analysts at Berenberg.

"[...] The result also complicates the outlook for European reforms. In an economic upturn, misguided policies may not make a dramatic difference. But in the long-run, Italy may have to pay a heavy price for reform reversals.

"The outlook for further pro-growth reforms in Italy looks dim for now. Instead, Italy could be heading for partial reform reversals and an increase in public spending that may lead to some conflict with Italy's partners in the EU. If the 5Stars focus more on their anti-corruption drive than their expensive spending promises, the outlook may be less concerning."