Why markets are less afraid of Rome’s turn than London’s

While Meloni’s Euroskepticism and closeness with Hungarian strongman Viktor Orban have put some European leaders on edge, she appears to stick with former Mario Draghi’s stance on backing Ukraine and budget commitments. Coalition politics and the constraints of EU fiscal rules have kept investors from panicking over an economic platform that includes tax cuts and a bridge to Sicily, despite potentially costing up to 3.9% of GDP.

The spread between Italian and German government bond yields – known in Italy as the ‘low spread’ – has widened, but not when the pandemic struck, or when populists last came to power in 2018 and bonds -The market promised to fight speculators, since then it has become widespread. Meloni is expected to favor culture wars over economic wars.

In contrast, with a response to tax cuts and reforms under the Liz truce, £161 billion, or about 6.5% of GDP, Meloni sees as a role model. Britain’s gilt production has increased compared to Italy’s. Pledge bargaining is going on. The pound has fallen against the US dollar and the euro, with economist Olivier Blanchard noting that Europe’s single currency should feel lucky that the UK never joined. Truss is now in danger of looking less like Thatcher and more like Mitterrand.

Markets are capable of irrationality, and Italy is capable of even worse surprises. But here is the logic. Italian political crises have become habit, and investors think they have the measure of Meloni’s playbook. Today’s Eurosceptic politicians have learned from unsuccessful attempts to bring their own Brexit or wage budget war on Brussels and the bond markets at the same time. “Georgianomics” may still be an unknown quantity, but it leans toward conversation rather than confrontation—or italexit.

EU institutions such as the European Commission and the European Central Bank have also expanded their toolkits, creating more guard rails against furniture-throwers. The austerity spell that fed populist anger has been softened with a €191.5 billion pandemic recovery fund for Italy’s economy, provided targets and reforms are met. And Christine Lagarde’s crew has made clear their support for the euro with a bond-buying tool designed to curb spillover risks, provided eligible countries stick to post-pandemic commitments.

Britain is not Italy economically or politically, yet it offers a cautionary market story as it starts economic tussles that even the populists in Rome would like to avoid. In a medium-sized open economy, especially at a time of 10% inflation and 2.25% benchmark interest rates, the UK Chancellor of the Exchequer Quasi Quarteng’s announcement, given the UK’s relatively low debt, is an invitation to sell. , As Dan Hanson of Bloomberg Economics notes, the parallels with the early 1970s—when the “dash for growth” eliminated inflation and currency depreciation—are hard to ignore. International policy makers are circling the plan.

Here, the need to fight the ‘Left’ is spreading in the markets. The quest for a Brexit dividend in an economy with less regulation has exhausted market patience; The quarantining of the EU-era bonus cap for bankers has also failed to excite bankers. More relevant Brexit effects are the post-2016 sterling weakness, greater barriers to trade, the loss of European workers that has tightened labor markets and high pandemic inflation. If economic thought is becoming more radical, it shows the need for a Brexit victory which proves the exceptionalism of the UK. “We’re out of Europe and we haven’t done anything,” says pro-Brexit hedge-fund manager Crispin Ode, who also bet on a fall in the pound. This is all made worse by an open conflict between the UK government and the United Kingdom. The Bank of England which appears to contradict the ECB’s past “whatever it takes” promise. The Tories of the truss want to slam the accelerator while the central bank wants to apply the brakes.

To be clear, this is a snapshot in time of market disarray – it doesn’t need to last forever. Nobel Prize-winning economist Paul Krugman may have fully valued Britain’s “silly risk premium”.

In Italy, Meloni’s coalition government is still an undisclosed amount. If Italy’s budget deficit does not improve, UBS Group AG believes Italy’s debt-to-GDP ratio could rise to 162% by 2027.

But while the UK may also turn to an Italian-style market target, due to a sharp policy turn, it is a warning no one will forget in a hurry.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France.