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Italy's populist 'mad man' extremely worrying for euro area stability: Euro zone economist

Jacopo Landi | NurPhoto via Getty Images

Italy's anti-establishment and anti-euro party Five Star Movement (5SM) represent the greatest threat to euro area stability, analysts told CNBC on Tuesday, as the populist party surged ahead of its political rivals in the latest opinion poll, putting it on course to be the biggest party if elections were called.

5SM leader Beppe Grillo has enjoyed a recent, and remarkable, uptick in support, buoyed in part by the divisions in the ruling Democratic Party (PD) as former Prime Minister Matteo Renzi attempts to regain support.

Grillo, who has campaigned for Italy to hold a referendum on the single currency if elected, has overseen 5SM's support grow to 32.3 percent, according to an Ipsos poll published in daily newspaper Correa della Sera on Tuesday.

"If Five Star Movement could secure 30 or 40 percent of the vote then of course that would be extremely worrying for the euro area's stability. Whether they can gain an absolute majority… we'll have to wait and see," Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics told CNBC via telephone.

Europe's prospects are worsening, not improving

Italy is due to hold its next national election by early 2018 and, although Europe's heavy political calendar has pushed the thought of Italy to the back of most investors' minds, Deutsche Bank analysts argued it is Rome that poses the greatest threat to the euro area's stability.

The German lender suggested its base case scenario is for Renzi's PD party, currently second in the polls, to fracture as a result of internal feuds. If this were to happen, it would then leave 5SM in the driving seat ahead of the country's general election.

"Political developments are in line with our expectations (and) if anything, they have strengthened our conviction of a challenging political outlook… So overall (Europe's stability) prospects are worsening, not improving," Marco Stringa, senior economist at Deutsche Bank told CNBC via email.

At the moment, parties in Italy are still looking to draw up a new electoral law, which most observers expect to result in a form of proportional representation that could reward a stable majority government to any party that can secure over 40 percent of the vote.

5SM are significantly below the 40 percent threshold and have ruled out any desire to form a coalition government. However, Vistesen and Stringa both suggested with some confidence that Italy could expect weak economic growth throughout 2017 and therefore it would be conceivable for Grillo's 5SM to enjoy even greater support in the run up to a vote.

Both France and Germany are due to elect new premiers before Italy and Vistesen concluded that, so long as the political favorites are able to win in each country, then Europe should be strong enough to manage a "mad man" like Grillo becoming Italy's Prime Minister.