For weeks, the Eurozone has been dogged by political uncertainty in two of the bloc’s largest economies, Germany and Italy. Monday brought a return to type, if not stability, in them both.
The week began with the news that Germany’s political limbo was finally over, after members of the opposition Social Democrats (SPD) voted in favour of forming a coalition with Chancellor Angela Merkel’s conservatives.
Grand in name only
The deal, which will see the creation of another “Grand Coalition” between left and right- wingers, ends nearly six months of political horse-trading in the wake of last year’s inconclusive election result.
Mrs Merkel’s poor showing in the election results, and the ensuing political hiatus - the longest in post-war German history - have left her politically weakened.
The Chancellor begins her fourth term having wasted significant political capital by trying - and failing - to form coalitions with two other parties before finally settling on the SPD.
So despite the strength of Germany’s economy - the Eurozone’s largest - its leader is a diminished figure, both on the domestic and the EU stage.
Elephant on a unicycle
Germany’s political system is famed for producing coalition governments. So too is Italy’s.
The difference between them is that German coalitions tend to endure, while Italians coalitions often have all the stability of an elephant riding a unicycle. And if we’re really pushing the analogies, all the longevity of a gelato under the Sicilian sun.
Italians woke up on Monday to the news that after a hotly contested election campaign, the country has once again elected a hung parliament. Weeks or months of coalition talks now loom before a government can be formed.
So far, so conventional. But what is less conventional - and more worrying for investors - is that neither of the two parties with the best chance of being involved in Italy’s new government are from the political mainstream.
The Eurosceptic, populist Five Star Movement was the biggest single party with a third of the vote.
But the right-wing, anti-immigrant League party also said it had been endorsed to run the country as part of a centre-right alliance.
The success of the populists means the ruling Democratic Party - which was the big loser after winning less than a fifth of the vote - is set to be squeezed out.
EU’s nightmare now theoretically possible
It also means that, as the BBC’s Europe Editor Katya Adler noted wryly, it is now "theoretically possible for the EU's nightmare result to come true: a coalition between the 'populist Eurosceptics': Five Star and The League.”
Brussels will also be unnerved by the knowledge that more than half of Italians voted for parties which have been highly critical of the EU. Italy was a founding member of the bloc and Italians have traditionally been among its biggest cheerleaders.
No longer. Euroscepticism is on the march in Italy and the EU’s new spiritual leader - French President Macron - can no longer count on Italian support in his push for greater integration in the face of Brexit.
Italy’s main stock index fell in response and investors moved out of its bonds, raising the country’s borrowing costs. On a day when the major European equity markets all rose, the FTSE Mib index in Milan fell 0.9 per cent in morning trade. And the yield on 10-year Italian government bonds rose 6.1 basis points to 2.104 per cent, a five-session high.
Italy may be used to such uncertainty, but that doesn’t make it any more palatable for the markets.
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