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Italy's 'unnecessary' political crisis could turn out to be a positive for Rome, analyst says

Key Points
  • Two possible outcomes to the Italian political crisis include: a coalition between M5S and Partito Democratico (PD), which criticizes both the trade unions and the banking industry; or a right-wing coalition led by Lega.
  • Some analysts believe that, for example, a coalition between M5S and PD would not last the entire political cycle.
  • At the same time, some analysts raise questions about the economic policies that a Lega-led government would pursue.
Matteo Salvini, Italy's deputy prime minister, looks on during a news conference with Marine Le Pen, leader of the French nationalist National Rally party, not pictured, on Monday, Oct. 8, 2018. 
Bloomberg | Bloomberg | Getty Images

There's an upside to the ongoing political crisis in Italy: the upcoming government cannot be worse than the current M5S-Lega coalition, a former official at the Bank of Italy, told CNBC Wednesday.

Rome's two-party coalition came to an abrupt end Tuesday after Prime Minister Giuseppe Conte resigned from his post following pressure from the right-wing Lega party. President Sergio Mattarella will hold consultations with various parties in Parliament in the coming days to see whether there is a working majority which would avoid the need for fresh elections. Analysts have dubbed the ongoing political chaos as an "unnecessary" rift.

"That was the worst possible coalition for economic policy, both in terms of fiscal policy, both in terms of structural policies. So, anything that comes in place of that would be better," Francesco Papadia, a senior fellow at the think tank Bruegel and former official at the Bank of Italy, told CNBC's Squawk Box Europe, said about the Lega-M5S coalition.

Rome's coalition was made up of Lega and the anti-establishment Five Star Movement (M5S). The Lega party favors tax cuts and aims to stop illegal immigration while the Five Star Movement (M5S) promotes initiatives that would extend benefits for citizens. Both parties, as a coalition, pushed for higher spending and challenged the European Union against its fiscal rules. The collision with Brussels sparked market jitters on different occasions.

Markets pay particular attention to Italy's spending, given its public debt pile. This stands at above 130% of its growth rate, one of the highest in the world.

Two scenarios: an M5S-PD coalition or a Lega-led government

Two possible outcomes to the Italian political crisis include: a coalition between M5S and Partito Democratico (PD), which criticizes both the trade unions and the banking industry; or a right-wing coalition led by Lega.

Papadia added that the possible scenarios are better than the Lega-M5S government, but "better, of course, does not mean good."

Some analysts believe that, for example, a coalition between M5S and PD would not last the entire political cycle.

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Any government that replaces Italy's coalition would be better for the economy, expert says

"A M5S-PD coalition would likely introduce more fiscal discipline, but its lifespan would probably be short," Matteo Ramenghi, chief investment officer at UBS global wealth management said via email.

At the same time, some analysts raise questions about the economic policies that a Lega-led government would pursue.

"(Salvini) wants to go for the easy wins," Ralph Jainz, fund manager at Centricus Asset Management, told CNBC's Squawk Box Europe.

"He is very Trumpian in his approach to economics, which gives you a little bit of a very short momentum and reacceleration of growth, but the tough measures that need to be taken, even Salvini doesn't really seem to address so far," Jainz added.

Salvini, the Lega's leader, who has been criticized for seeking a snap election to capitalize on his recent rise in popularity, said Tuesday that Italy needs a budget worth 50 billion euros ($55 billion) for 2020 to provide a "shock" fiscal stimulus, Reuters reported.

Opinion polls show Lega placing ahead of all other Italian parties at 36%. It came to power as the junior coalition partner, but Salvini's tough rhetoric has helped him to boost its popularity in a country where immigration is a dividing issue. M5S has, meanwhile, seen its support drop and is currently polling third at 19%.