Far-Right Leader Is in Box Seat to Succeed Mario Draghi in Italy

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(Bloomberg) — Italian voters are expected to propel Giorgia Meloni to prime minister on Sunday, making her the country’s first woman and first far-right prime minister since becoming a republic.

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Meloni, leader of the Brothers of Italy party, is the favorite to win the general election at the head of a right-wing coalition, according to opinion polls released before a blackout period.

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While political maneuvering to form a government after a vote has taken an average of 45 days in recent times, the winners will have no time to waste. Foreign investors and partners are watching closely, with the euro zone’s third-largest economy hit by Russia’s invasion of Ukraine, rising energy prices and rising interest rates interest

Meloni has repeatedly sought to allay fears that he would defy European Union rules designed to control deficits or jeopardize nearly 200 billion euros ($196 billion) in bailout funds for the bloc by seeking to renegotiate some of the terms. Any change in Italy’s pro-EU stance could exacerbate fears about the country’s colossal debt burden.

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The first ballots are due when voting closes at 11pm Rome time on Sunday, and the results will be followed throughout the night. Meloni’s alliance includes Matteo Salvini of the anti-migrant League and Silvio Berlusconi of the center-right Forza Italia.

The talks to forge a new administration will come after Italy holds its first elections in the autumn, the period in which governments must draft the budget law for approval at the end of the year.

Meloni’s reassuring messages have kept Italy’s risk premium contained. The spread between Italian and German government bonds, a barometer of debt risk, has widened just 15 basis points since July 19, the day before outgoing Prime Minister Mario Draghi announced his resignation.

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However, Meloni’s lack of government experience could compound the challenge ahead.

“The probability that the Brothers of Italy will lead the next government in Italy is very high,” said Martina Carone, political analyst at YouTrend. “For investors, any government he forms will be less credible than the outgoing one, but that’s also why he will do everything he can to act.”

Among the first steps in forging a new administration will be consultations with the parties led by Sergio Mattarella, whose task is to choose a first-designate president before a parliamentary vote to verify majority support. The new parliament, which has been reduced to 200 senators and 400 lower house lawmakers, will meet on October 13 to elect the presidents of both houses.

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“In mid-October we will see what the chemistry is like within the right-wing coalition,” Francesco Galietti, a political analyst at Policy Sonar in Rome, told Bloomberg TV on Friday. “Because you want to see how Meloni deals with Salvini and Berlusconi, who becomes the president of the senate, who becomes the speaker of the chamber, that would be a good indicator.”

Meloni’s political agenda includes a flat tax, although he disagrees with his allies on the level at which it should be set. It would also seek to protect Italian companies from foreign takeovers and oppose the expansion of civil and LGBT rights.

Adding to the political uncertainty, it is unclear to what extent a Meloni coalition leadership would deliver a large majority of seats, due to Italy’s complex electoral system. Some projections before the blackout period estimated that the right-wing bloc could win a two-thirds majority of seats in both houses of parliament, enough to change Italy’s constitution.

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Former Prime Minister Giuseppe Conte saw his anti-establishment Five Star Movement surge in the latest available polls, buoyed by a promise to maintain the so-called citizen’s income, an unemployment benefit that resonates in the south of the country.

“While it is highly unlikely that the right-wing coalition will fail to win a majority of seats, there is substantial uncertainty about the distribution of votes within the coalition,” JPMorgan’s Marco Protopapa and Aditya Chordia wrote in a note to customers in September. 21. A poor result for Salvini’s League would give it “modest bargaining power” to challenge Meloni’s recent moderate shift, they said.

A large right-wing bloc majority of close to two-thirds of the seats could be “a negative surprise for markets” that would pose an “increased risk of erratic policymaking and miscommunication,” JPMorgan said.