The March ballot could lead to political and market instability in the eurozone’s third-largest economy.

Italian President Sergio Mattarella dissolved parliament in December, setting the country on the path to national elections on March 4 under a new electoral law. This has raised concerns about political instability in the eurozone’s third-biggest economy.

Opinion polls show the anti-establishment Five Star Movement (M5S) leading Prime Minister Paolo Gentiloni’s Democratic Party, as well as groups in a possible center-right coalition that would include former Premier Silvio Berlusconi’s Forza Italia. The polls projected support for M5S at around 28%, the Democrat Party at around 22%, Forza Italia at around 16%, and the Northern League at about 14%. It’s likely the M5S will be the single, largest party in the lower house after the election.

Historically, Italy’s president gives the largest party the first chance to form a government, creating the possibility M5S would lead the government, or attempt to form one. However, Mattarella indicated he would rather opt for mainstream political leaders, a move that could create a political storm. Under such a scenario, a right-wing alliance led by Berlusconi, or a grand coalition, could emerge. The right wing seems to be swinging behind Berlusconi, whose leadership is questionable. He is appealing a ban on holding office because of a 2013 tax fraud conviction, and the appeal is currently before the European Court of Human Rights. (Italian courts had rejected his earlier appeals.) A coalition government, on the other hand, will be unable to address structural reforms.

We already see bouts of weakness in Italy’s equity and fixed-income markets. There is considerable headline risk between now and the election largely due to the popularity of the anti-euro M5S, and Berlusconi’s absurd campaign promises that include circulating a parallel currency, and a set of tax breaks for pet owners. The risk is that the markets will start taking some of his campaign rhetoric seriously. The debt market is also likely to face pressure from an end to the ECB’s bondbuying program. Finally, there are concerns that hawks at the ECB will prevent any further extension of the QE program, which is set to end in September.

Italy must refinance debt equivalent to 17% of GDP in 2018, and its debt stock remains above 125% of GDP. The country is both too big to fail and too big to save. Reforms have been slow to put Italy on a sustainable growth path. This is going to become a lingering problem for Brussels and Berlin.

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