All Roads Lead To Rome

By Stefan Koopman, Senior Macro Strategist at Rabobank

Italy has style and flair that everyone wants a piece of, from their killer fashion sense to their mouth-watering cuisine. Yet, when the conversation turns to its politics, it’s all eye rolls and snarky comments. That’s not entirely fair, though, because more often than not, Italy has been at the forefront of how we all do politics today.

Fascism took root on Italy’s soil before spreading beyond its borders. This fertile environment also accelerated the transformation of political parties from grassroots organizations to power-centric entities, a cycle of patronage immortalized by figures like Giulio Andreotti. With the disintegration of this system in the early 1990s, Berlusconi stepped onto the scene with his innovative take on populism through television, ushering in an era where personality trumped policy. The Five Star Movement’s rise further reshaped the political scene, enhancing the role of social media and the internet. And now a far-right party, whose lineage can be traced back to neo-fascist movements, has successfully carved out its place in government by taking a firm stance on identity politics while carefully navigating foreign policy and economic issues.

These shifts have been punctuated by technocratic governments, often led by bankers, who have calmed investors and enacted unpopular but necessary reforms. Italian politics show that closing the gap between citizens and their government remains very difficult, with leaders persistently seeking and embracing new solutions. In Italy, this divide is more pronounced due to the country’s rapid and somewhat artificial unification, making it a bellwether for similar trends elsewhere. You could say that all roads lead to Rome.

The current Italian playbook is clear. You could see its implementation in the Netherlands, where the two populist parties in the forthcoming Schoof cabinet control most of the domestically oriented ministries, while the two centrist parties oversee the finance ministry and foreign affairs. Such an approach may also emerge in France. In recent years, Marine Le Pen has carefully smoothed out some of the rough edges in her image and party brand. She quietly distanced herself from advocating for Frexit, distanced herself from Putin since he invaded Ukraine, and adopted a slightly more diplomatic stance on issues such as immigration.

It makes this Financial Times article all the more surprising. In light of the far-right’s emboldened stance after the European elections, Jordan Bardella, prime ministerial hopeful for the Rassemblement National (RN), may start a Paris-Brussels rift by vowing to negotiate a rebate of France’s EU contributions. Despite the slim odds – owing to the EU’s fixed budget until 2027 and the implications of either increased contributions from other member states or new debt – success would earn Bardella acclaim for challenging EU officials. Failure, however, would allow him to lay blame on Brussels. We are also seeing this in the Netherlands, where an EU rebate is underpinning the financing of the Dutch coalition agreement and where being ‘tough’ in Brussels is mostly for domestic political considerations.

Concurrently, and looking much more ‘Italian’, public broadcaster franceinfo reports that the RN, should it ascend to power after July 7th, plans to appoint a non-affiliated individual to the Ministry of Economy and Finance, looking at candidates that could placate financial markets and investors with a seemingly credible past. The true direction will become clearer in two weeks’ time, potentially confirming whether, indeed, all roads lead to Rome. 

Germany continues to give France nudges in that direction. Asked about potential ECB support in the event of a French crisis, German finance minister Lindner said that intervention in French government bond markets would raise economic and constitutional questions. Usage of the TPI would, according to Lindner, “test the German finance minister to see whether all this is still in line with treaty law”. He has a point, though. Recall that the European Commission has proposed that the Council should place France, along with six other Member States, under the excessive deficit procedure, which would disqualify them for the ECB’s TPI. The spread on the two countries’ 10 year notes is currently 83 bps. The first round of voting will be held this Sunday.

In this U.S. election’s first presidential debate, two senior citizens hurled insults at each other, taking offense especially when their golf abilities came under scrutiny. One stumbled and fumbled, the other told falsehoods. It’s quite a sorry state of affairs, but Biden’s performance was particularly painful to watch, raising worries about his age, his mental fitness, and his chances against Trump. There are now plenty of reports of panicking Democrats, with even CNN pundits seeming to give up, as there is no evident strategy to shift the narrative. Perhaps the decision to stage this debate so early in the race might be a stroke of genius. With the Democratic convention still on the horizon, there is time for change. So this makes it all a bit unclear whether the night really favored Berlusconism, or whether the Democrats find a new way to Rome.

That said, Treasuries did fall during the debate, with the yield on the 10-year note rising 3 bps to 4.32%. The dollar rose, although here too, the move was modest and looks to have faded. It all reversed some of the price action of yesterday afternoon, when U.S. economic data showed a further rise in continuing jobless claims, reaching a peak unseen since late 2021. This uptick contributes to a growing body of evidence suggesting a still robust labor market that does show signs of relaxation, appearing increasingly more ‘pre-pandemic’ than ‘post-pandemic’. A surprising downturn hit factory orders for business equipment, and US pending home sales plummeted to new lows in May, as high mortgage rates and high prices deter potential buyers. The Atlanta Fed has downgraded its Q2 GDPNow forecast from 3.0% to 2.7%. We foresee a further deceleration in consumer activity for the second half of 2024, which is not helping Biden either but may pave the way for a Fed rate cut come September.