How Italy’s Populist Turn Could Affect Your Portfolio

In late February, my partner and I rented a beautiful apartment in the medieval quarter of Genoa, Italy. It was a great getaway, and as it happens, our experience also gave us new insights on populism and the global financial markets.

It was an interesting time to be in Italy, not only because Southern Europe was gripped by a record-breaking cold snap (it was snowing along the Mediterranean!) but it was the week before the Italian general election. The air was filled with uncertainty as both left- and right-leaning populist parties zeroed in on incendiary economic and immigration issues to gain traction in the polls.

Every morning, we watched from our window as a young guy set up a loudspeaker and a table laden with signs and pamphlets next to our building. He broadcast his message through the loudspeaker all day long, not yelling, just reciting in monotones, as though he was reading from a long, tedious script. Unfortunately, understanding it was beyond our language comprehension.

For the first few days, we tuned it out, but finally my curiosity got the best of me and I decided to ask him what it was all about. One great thing about Italy is that nearly everyone is friendly and outgoing. Chatting with strangers is a national pastime.

The activist was eager to engage me in conversation, even though, as an American, I could be of no help to his cause. I learned that he belonged to a party called Lega (it means “the league”), one of many jockeying for political power. Lega’s platform is nationalistic, anti-immigration, and especially anti-European Union.  Bad as my Italian is, I still remember a slogan he used: Prima gli Italiani!

At first, I thought it meant “Italy Above All,” a disconcerting motto, given the country’s mid-20th-century history. But he corrected me: it’s actually “Italians First.”

Does that remind you of anything? It’s not just our own country where populism is catching on. The movement is spreading across Europe. In Italy’s March 4th election, Lega won the most seats, followed by another populist party known as the Five Star Movement. Support for traditional organizations like the Democratic Party is fading.

So why should you care?

Well, both the League and the Five Star Party espouse anti-European sentiment and a go-it-alone mentality. If they force a referendum on whether the country should stay in the European Union (EU), we might see a rerun of Brexit.

And that would be a very big deal. Italy is the third-largest economy in the Euro zone and the second largest debtor nation, as measured by debt-to-GDP, within the G20. A withdrawal from the EU, or simply the political instability caused by a debate, could have a negative impact on global financial markets.

Remember the Greek government debt crisis that started in 2010, causing stock markets to slide across the globe? For Italy, multiply those effects by a factor of at least 10. If you’re not prepared, that could be a bad scenario for your investment portfolio.

To learn more about Italy’s political turmoil and how it affects your investment decisions, read this MarketWatch article about how politics in Italy caused a recent Wall Street selloff. For more in-depth perspective on Italian politics, I recommend this New York magazine article.