Italy faces its Navarro-Mnuchin moment

The Five Stars Movement and the League have presented Giuseppe Conte as the next prime minister of Italy. The choice of a little-known academic for the best job in the country will naturally raise eyebrows, but should not be the main concern of investors. The identity of the next finance minister will be much more important for the stability of Italy's and Europe's economy.

That does not mean that Conte's decision, if ratified, lacks interest, especially because of its delicious irony. For years, Italy's anti-establishment parties have rebelled against unelected technocrats, including Mario Monti, an economist and former EU commissioner who led Italy at the height of the sovereign debt crisis. Now they have their chance to reach power, the League and the Five Stars are chubby for an academic who never shows up in parliament.

Luigi Di Maio, the leader of the Five Stars, has tried to reinforce Conte's political credentials by saying that he had been included in his prospective party government team. But the law professor was just one of several possible ministers who played only a minor role in the campaign. His biggest advantage is being an acceptable compromise candidate for both Di Maio and Matteo Salvini, the leader of the League.

The two parties would have preferred to elect Di Maio as prime minister. The Five Star Movement is by far the largest party in the populist coalition, having won approximately twice as many votes as the League. Di Maio does not have experience either, but he has a popular mandate. He should be the face of government, instead of hiding behind a man that very few people have ever heard of.

There are legitimate questions about how independent Conte would be from his two political masters, and if this will affect his ability to obtain with work. That is one of the reasons why President Sergio Mattarella has not yet signed his appointment.

However, Conte is a secondary spectacle for investors. In fact, an ineffective unconscious populist government could be better than a successful one. Yields on Italy's bonds have soared and the stock market has fallen after the League and Five Star revealed a program of tax and expense cuts.

Stock Shock

Italian stocks have fallen because populists have outlined their plans

Source: Bloomberg

Markets will keep a more anxious eye on the election of finance minister, who will have the power to cause more lasting damage. Italian newspapers say that one of the main contenders is Paolo Savona, an 81-year-old economist and former minister with euroskeptic views. An alternative is Giancarlo Giorgetti, who is the right hand of Salvini, but it is known that he has doubts about an "exit from Ital".

So the election of the finance minister could help answer the big question at the heart of the supposed anti-establishment government: how real is the threat to the euro's membership in Italy. The League and the Five Stars have eliminated any direct reference to a possible deviation in their coalition agreement. But his program will still put Rome on a collision course with Brussels and other European capitals on issues ranging from public finances to state aid.

Investors are desperate to see if the parties are really committed to the single currency, when the inevitable shock comes.

This confrontation between "pragmatists" and "idealists" has been at the heart of other populist administrations, or those that struggle with the popular mandates of referendums. In the USA US Treasury Secretary Steven Mnuchin is battling with White House business adviser Peter Navarro to avoid a total confrontation with China. In Greece, Finance Minister Yanis Varoufakis was replaced when it became clear that his ideas had pushed the country out of the euro. In the UK, Finance Minister Philip Hammond and Foreign Minister Boris Johnson disagree over whether Brexit Britain should stay close to the EU.

The Five Star Movement and the League still need to decide where they are. Italy's membership of the euro has a far greater consequence than the credentials of a new prime minister.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Ferdinando Giugliano at [email protected]

To contact the editor responsible for this story:
James Boxell at jboxell @


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