The announcement of Italian Prime Minister Matteo Renzi’s resignation is unlikely help the Eurosceptic Five Star Movement form a government, but is likely to constrain Eurozone stock markets, according to Principal Global Investors.
Speaking to InvestorDaily, Principal Global Investors chief global economist Bob Baur said that Mr Renzi’s resignation could even make it more difficult for the populist, anti-EU Five Star Movement to form a government.
“The downturn from the Italian referendum only lasted a short time and markets recovered. Further, with the likely change back to proportional representation in the Parliament, it’s possible that the Five Star party may have a more difficult time setting up a government even if they win the most seats,” he said.
Instead, Mr Baur explained that Italian President Sergio Mattarella would likely appoint a “proven technocrat” to manage the country’s economy, with a new election not being held until “late 2017 or early 2018”.
“Even if the Five Star movement gets the most seats in Parliament, they may not be able to form a government and thus not put European Union membership up for a referendum,” he said.
Despite this, Mr Baur noted that Mr Renzi’s resignation announcement had led to a level of political uncertainty in the region, which is likely to constrain Eurozone stock performance.
“This type of uncertainty is never good for markets and will likely keep Euro-area stock markets underperforming the broad equity rally that has been going on since early this year and will likely continue until well into 2017,” he said.
Mr Baur said markets in the region were likely to stay volatile, with Euro area growth expected to continue growing “in the modest range” of 1.5 to 2 per cent over the next year or so.