RaboResearch - Economic Research

What a right-wing coalition would bring Italy


  • On September 25, Italians will head to the ballot box for national elections
  • The right-wing coalition is set to win an absolute majority, with the conservative far-right Fratelli d’Italia as the largest party
  • The coalition wants to curb immigration and focus on ‘traditional Christian family values’
  • It will continue to support sanctions against Russia and not put eurozone membership at stake
  • The largest party-to-be also says it won’t blow up the debt or put EU recovery funds at risk, but it wants to renegotiate the rules, while the second party within the coalition clearly has fewer issues with spending borrowed money
  • In any case, a lack of policy details and diverging priorities and stances among coalition parties feed into policy uncertainty going forward, with a higher risk of fiscal slippage, delays in the implementation of the recovery plan, and a worse relationship with the EU
  • The spread between Italian and German government bond yields will probably widen upon political risk
  • Our analysis shows the importance of keeping fiscal policy in check to safeguard debt sustainability and affordability

Right-wing coalition set to win…

On September 25, Italians will head to the ballot box for national elections in the lower and upper house of parliament. With the blackout period for polls having begun, we look at the final polling numbers and what party programs can tell us about what to expect from the next government.

In short, a right-wing coalition headed by the far-right conservative Fratelli d’Italia (FdI) is set to win the elections with an absolute majority. FdI’s leader Giorgia Meloni, in particular, has been trying hard to convince markets, friends, and foes that the party would pursue sensible economic policy and be a reliable partner for Europe and the US. Yet a delay in reforms and investments within the country’s recovery program is likely, while diverging priorities among coalition parties and a lack of details feed into policy uncertainty going forward. 

…with an absolute majority

Italy’s the electoral system is a mixture of first-past-the-post (FPTP) and proportional representation (called Rosatellum). This supports pre-election coalition building as explained in Box 1. Table 1 shows the most recent polling data for individual parties and the pre-election coalitions they are part of. While parties running together are not obliged to stick together after the elections, the winning coalition is likely to try to find parliamentary support to govern first, before potentially exploring other options. As such, both the individual party and coalition outcomes are important.

Table 1: The right-wing coalition significantly outpaces the left-wing coalition in the polls
Table 1: The right-wing coalition significantly outpaces the left-wing coalition in the pollsSource: Macrobond, Europe elects, RaboResearch

The most relevant observations from the latest polls (the average of last week’s polls) are:

  1. Far-right Fratelli d’Italia (FdI) leads the polls at 24.6%, closely followed by the center-left Partito Democratico (PD) at 22%, with the gap widening over the past two weeks (Figure 1);
  2. At a significant distance we find populist Movimento 5 Stelle (M5S) and far-right Lega at 13% and 12.5%, respectively, with the former on an improving trend in recent weeks from a ten-year low, while the latter has seen a decline in support;
  3. Importantly, the right-wing coalition has a strong lead over the center-left coalition: 46.3% vs. 28.7%, with the latter, in turn, comfortably ahead of the loner Movimento 5 Stelle (M5S) and the joint list of centrist parties (the so-called third pole), which comes in at 6.5%. Currently the third pole is mainly depriving the center-left coalition of FPTP seats;
  4. A broadening of the center-left coalition with M5S and/or the centrist list is unlikely: The PD does not want to run with M5S, and the centrist list does not want to run with both M5S and some parties within the center-left coalition. An enlargement with one of the two would not be sufficient for the center-left coalition to outdo the right, but would somewhat tighten the latter’s majority;
  5. Some 40% of voters are still said to be undecided. Clearly they have the potential to significantly shift the balance. Yet, according to a recent study, only between a quarter and half of those undecided voters are likely to end up voting.
Figure 1: FdI has strengthened its lead
Figure 1: FdI has strengthened its leadNote: Polls are presented as one-week averages
Source: Macrobond, RaboResearch
Figure 2: Right coalition leads by a wide margin
Figure 2: Right coalition leads by a wide marginNote: Due to FPTP, seat distribution will differ from % votes. Source: Macrobond, RaboResearch

So, the question is not so much who will win the elections, but how many seats FdI, Lega, and FI will end up winning.

Because of the FPTP element, we cannot simply project the share of support in the polls onto the number of seats to be divided. Polls specifically targeted to the FPTP seats are not widely available. The Cattaneo Institute, together with YouTrend, is the only one to have run several simulations in recent weeks. The most recent simulation published on August 9 – still useful – foresaw an absolute majority for the right-wing coalition, with FdI as the largest party within it. A two-thirds majority, which is required to change the constitution without holding a referendum, seemed out of reach.

That said, according to news agency Ansa last week, recent simulations by YouTrend suggest that if the right-wing coalition can increase its lead over the left to 22 percentage points (it is up 17.6 points currently), it would, in fact, obtain that two-thirds majority. The ability to change the constitution without having to rely on the opposition or a referendum would clearly open a whole range of ‘opportunities’ for the coalition – for example, to change electoral law, curtail powers of the Senate, and reshape the powers of different layers of government. Most importantly in the short term, it would allow the coalition to alter the way the president is elected as they wish. According to their manifesto they want the president to be elected by the people, rather than by parliament, as is currently the case. Too little detail is currently known, however, to have a solid view on the economic implications of such a move.

Box 1: The electoral system

Italy’s electoral system is a mixture of first-past-the-post (FPTP) and proportional representation (PR). Approximately one-third (3/8) of the seats in either house is allocated via the FPTP method and about two-thirds (5/8) via PR. In a FPTP district there is only one seat up for grabs and the candidate who receives the most votes in such a single-member district wins that one seat. The allocation of PR seats in the lower house (the Chamber of Deputies) is performed at a national level and in the upper house (the Senate) at a regional level. This is among those parties that meet the minimal voting threshold.[1] In total, the Chamber will have 400 seats and the Senate 200 (reduced from the current 640 and 315, respectively).

The FPTP part of the system, in particular, benefits pre-election coalitions, as parties within a coalition can strategically choose one candidate that can attract the votes of all the parties within a coalition. For example, the right-wing coalition (see more below) including Fratelli d’Italia, Lega, and Forza Italia, will present one candidate they hope can attract the votes of the supporters of all three parties, rather than present one candidate each – i.e. three candidates –that would divide the rightist votes among them. As such, they are much more likely to beat a candidate of parties running alone. 

A manifesto with little detail

Against the backdrop of these polls, the question is what we should expect from a government headed by FdI, with Giorgia Meloni as the next prime minister. Debates and the manifesto of the right presented a month ago give some direction, although the latter lacks much detail. It clearly had to be a program that all coalition parties can support, despite their differences. This, however, as we argue below, runs the risk that such differences will come to the fore once a government is up and running.

Conservative social policy

What is certain, however, is that moving from the Draghi government to a FdI-led government would mark a clear shift to the conservative right. The right-wing coalition wants to curb migration, is against abortion and same-sex marriage, and promotes ‘traditional Christian family values’ – the recent FdI objection to an episode of the cartoon Peppa Pig is a case in point. Apart from immigration, these ideas mainly come from the camp of Giorgia Meloni and her FdI, although Lega clearly also has issues with all kinds of minorities.

How to deal with migration is still a point of discussion. The manifesto talks about blocking migrant boats and creating so-called ‘hot spots’ in African countries to process asylum requests, working together with African authorities and the European Union. Based on debates, Fratelli d’Italia is clearly in favor of naval blockades, while Forza Italia has not really given an opinion other than that blockades would present legal difficulties. Meanwhile, Matteo Salvini has proclaimed that not blockades but relaunching 2018’s security decrees is the way to go. Broadly speaking, these decrees restricted the rights of asylum seekers and for that reason certain provisions in the decrees were altered in 2020, taking comments of President Sergio Mattarella and NGOs into account.

Curbing the rights of immigrants and minorities, or restricting all kinds of freedoms, could be seen as an attack on EU values, risking tensions on this front – as has been the case between Hungary/Poland and the EU, for example.

Italy will continue to support sanctions against Russia

The manifesto includes support for Ukraine, while also supporting international diplomatic initiatives to resolve the conflict.

Since the start of Russia’s invasion of Ukraine FdI has been a strong advocate of sanctions against Russia, supporting the Draghi government in this policy area. In recent debates, Giorgia Meloni has reiterated time and again that under her leadership Italy would continue to stand united with the EU against Russia. Meanwhile, Forza Italia has been supportive of Italy’s stance, but less convincing, and Lega’s leader, Salvini, has on multiple occasions asked to intensify peace talks rather than send weapons to Ukraine and sanction Russia. He has condemned the invasion, but does not support the way the EU is trying to bring Russia to its knees. He thinks that, in fact, it brings the EU to its knees. Two weeks ago, he intensified his protest by claiming that the EU should scrutinize current sanctions because of their damage to Italy – trying to play into the sentiment among the Italian people. In order to try to show the outside world that this matter need not break up the right-wing coalition, he now argues that Italy should continue sanctions but that the EU should throw up a shield to protect households and businesses from the damage done. In other words, for the EU to compensate countries for the economic damage sanctions have done.

Under a Meloni government, Italy will continue to support Ukraine and the sanctions, but Salvini is unlikely to jump fully in line. As time progresses and the economic outlook worsens, Salvini will probably intensify his call to focus on peace talks and financial support from the EU.

Fiscal policy: differing priorities, contradicting statements, and many wishes

In its manifesto, the right-wing coalition promises, among other things, tax cuts, higher pensions and more options for early retirement, more support for families with children, and to improve active labor market policies while ending the citizens’ income social welfare system, which Giorgia Meloni has called a total failure. It clearly combines priorities and hobbyhorses of the different parties involved: for example, Lega’s flat income tax, Forza Italia’s pension plans, and FdI’s family support.

How this will balance out with regard to the budget is unknown, as they didn’t do the math. The manifesto does argue for a revision of Stability and Growth pact rules, by allowing more spending flexibility. What that means exactly is unclear, but it does ring some alarm bells.

Meanwhile, in several media appearances and debates Giorgia Meloni has suggested in different words that she is against blowing up the debt, as the country is already overburdened, and that her government would adhere to EU budget rules. Yet from other statements we learn that FdI wants to change the rules to, for example, make more room for investment and to leave expenditure on the energy crisis out of the calculations.

Regarding the energy crisis, Meloni would welcome an EU-wide cap on energy prices, but does not want Italy to impose a cap alone nor does she agree with Lega’s unfunded emergency support plan of EUR 30bn (more than 1.5% of GDP, on top of the already allocated EUR 52bn). Instead, she has said she is in favor of decoupling gas and power prices in Italy (with estimated costs at about EUR 3bn to EUR 4bn), even if the EU doesn’t take a common stand on this – in the latter case it would need to get EU permission, though.

All in all, while statements are sometimes contradictory, FdI seems to want to be rather conservative when it comes to fiscal policy. Whether an FdI-headed government would indeed act that way is up for debate because of the many different wishes it has to accommodate and the fact that Salvini has no issues at all with increasing the budget deficit. The fact that Salvini’s Lega has seen a decline in the polls somewhat limits his influence. Still, FdI requires Lega’s support to govern and Salvini speaking out can help increase voter support going forward. Importantly, eurozone membership is not being questioned.

Of course adhering to EU budget rules is simple in 2023, with the escape clause still intact, but it will be a different story in 2024 if the rules were to be reactivated. Forza Italia sits a bit in between its coalition parties.

Figure 3: Italy’s debt ratio far exceeds the 60% threshold permitted in the EU’s budget rules…
Figure 3: Italy’s debt ratio far exceeds the 60% threshold permitted in the EU’s budget rules…Source: Macrobond, RaboResearch
Figure 4:…while the budget balance is much larger than the permitted maximum of 3% GDP
Figure 4:…while the budget balance is much larger than the permitted maximum of 3% GDPSource: Macrobond, RaboResearch

EU recovery funds likely to be delayed

Meloni has previously said that she will not put Italy’s EU Covid loans at risk, but does want to alter the recovery plan. This is necessary, she says, to put funds to better use and take into account the energy crisis, among other things. Meanwhile the EC has stated that the available wiggle room is limited. This, together with the fact that Lega has not shied away from confrontation with Brussels to make a point in recent years, raises the risk of tensions between the EU and Italy increasing. Importantly, because of the coalition’s wish to change the plan, but also because of a lack of governing experience and differing priorities among coalition parties, investments and reforms under the current recovery plan are likely to face delays. This will put the December tranche of EUR 19bn (about 1% of GDP) at risk – passing all the milestones required to receive the funds was already a challenge under the Draghi government due to the large number of reforms and investments still to be implemented, despite Draghi’s good intentions.

That being said, the government cannot afford to lose the EU funds and is expected to fall in line if push comes to shove, though possibly only after sufficient (market) turbulence.

Challenges risk higher bond yield spreads

At first glance, it is certainly comforting that Italy’s far-right parties are no longer advocating leaving the eurozone and that the largest party-to-be intends to pursue prudent fiscal policy and acknowledges the importance of the pandemic recovery fund. But, a lack of details and diverging priorities and stances among coalition parties feed into policy uncertainty and create the risk of fiscal slippage going forward. Moreover, apart from differing priorities, implementation will likely also suffer (or at least risk delays) from a lack of governing experience of a share of the squad, as we saw with the M5S/ Lega government back in 2018/ 2019.

So, while markets seem to have been comforted by the manifesto and Meloni’s assurances to play by the rules, our rates colleagues expect Italy’s bond spread versus Germany to rise upon political risk. However, they acknowledge that it could take a little while for this view to play out, as markets may require some hard evidence of the intentions and struggles of the coalition once they are in the driver’s seat.

Importantly, although the ECB has set up a Transmission Protection Instrument (TPI) to contain unwarranted bond yield spreads, we note that any spread control does not preclude ongoing yield pressures (see further Rabobank coverage of this issue here and here). Moreover, the TPI comes with strings attached. Effectively this means that the ECB will not trigger TPI if it deems that the new government does not stick to, for example, the recovery plan and European budget rules. 

The impact of bond yields on public finances

In a recent study (July 15) we already looked at the implications of higher government bond yields on Italy’s public finances. We argued that with ten-year government bond yields at 3.1% back then, the increase since the start of the year still seemed bearable in the short to medium run. In about four years’ time, however, debt affordability could become an issue, with interest payments-to-revenue passing the 10% threshold often used to gauge affordability.

We also presented some sensitivity analyses showing that a jump in yields could rather substantially bring forward both affordability and sustainability challenges. For example, a 100bp rise in bond yields would already bring forward debt affordability issues by at least one year (Figure 5). It would also push the required primary balance to stabilize the debt-to-GDP ratio from -0.5% to 0% in the short run and from +1.5% to +2.5% in the longer run, compared to a primary balance of -3.7% last year and +1.3% on average between 2002 and 2019.

Figure 5: Debt affordability at risk from 2025
Figure 5: Debt affordability at risk from 2025Source: Macrobond, Bloomberg, RaboResearch
Figure 6: Fiscal policy is crucial to the outlook
Figure 6: Fiscal policy is crucial to the outlookSource: Macrobond, Bloomberg, RaboResearch

Between simulations in July and now, yields have in fact risen by almost that 100bp (standing at 4% at 22 September), thus bringing forward affordability challenges and complicating the task of preventing the debt ratio to spiral upward.

Importantly, in our analysis we assumed a gradual return of the primary deficit into surplus. Yet we also checked the implications of different assumptions regarding the primary balance. It turns out that if the government would fail to improve its primary balance from last year’s near-record deficit of 3.7% of GDP, this would push up the debt-to-GDP ratio from 145% in 2030 in the baseline scenario, to 177% (Figure 6). Meanwhile, it would bring forward debt affordability challenges by one year, more or less, with issues specifically spiraling out of control toward the end of the decade. The sensitivity analysis shows the impact of fiscal policy on debt sustainability in particular, but also debt affordability. Hence, the next government will face the immense task of leading Italy through the energy crisis, while keeping an eye on the finances.

Uncertainty is a given

To conclude, uncertainty related to the upcoming Italian elections is not about who will be in the next government, but how the winners will govern. Based on current polling, the right seems invincible and is set to win an absolute majority. Despite the common right manifesto, there is little certainty about policy going forward. Details are lacking, while priorities and positions on contentious topics differ among parties. Specifically, while Giorgia Meloni is trying to convince everyone that as a PM she will respect EU budget rules and won’t put EU recovery funds at risk, Matteo Salvini’s tone and track record in dealing with EU authority is less comforting. Furthermore, Meloni also wants to alter the budget rules and content of the recovery plan, which will prove difficult to say the least. All in all, there is a risk of fiscal slippage, reform and investment delays, and increasing tensions with the EU. The latter could also result from policy related to curbing the rights of immigrants, minorities, and people not respecting ‘traditional Christian values.’

To make clear, from an economic point of view it is not a given that all will go wrong. With so many pieces of the puzzle still unknown, to state that nothing good can come out of a FdI-led coalition is obviously much too firm. Yet policymaking and implementation will face significant hurdles and policy uncertainty is set to rise substantially.


[1] Broadly speaking, parties have to obtain at least 3% of the votes at the national level to be assigned seats. For pre-election coalitions the threshold is 10%, with the requirement that at least one party/list within the coalition receives at least 3% of the votes. If that holds, votes cast for coalition parties that obtain between 1% and 3% of the national vote will be allocated to those parties within their coalition that do meet the 3% thresholds. Votes on coalition parties that obtain less than 1% of the national votes do not count.

Maartje Wijffelaars
RaboResearch Global Economics & Markets Rabobank KEO

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