It’s not news that the Italian government is undergoing challenges,. The economy has been a laggard in the Eurozone ever since the creation of the partial economic union because difficult reforms haven’t been made. The latest event in this saga is the country doesn’t have a government formed. This is the longest period without a government since 1992.
Unlike the US, where the election results and subsequent governments are almost always known after election day, Italy needs to form a coalition government because there were more than 2 parties which got a substantial share of the vote and none of them won a majority.
The big contention has been that the 5 Star Movement, which gained the most votes on March 4th, doesn’t want to work with the League’s ally Silvio Berlusconi. The League and 5 Star are the two dominant right wing euroskeptic parties. The latest news is that Berlusconi and his Forza Italia party won’t prevent League and 5 Star from forming a coalition. Interestingly, heading into the election, there wasn’t much volatility in Italian markets. Now the markets on edge because if the initial reforms proposed by the two right wing parties fail, they can decide to set up a referendum vote on whether Italy should leave the E.U. This situation is messy and is causing contentions with the E.U. because the Italian economy is joining the economic slowdown with Germany. It’s unlikely Italian fiscal policy will come to the rescue in the near term.