Tuesday, December 04, 2012

Political risk and uncertainty remain Italy's Achilles' heel (an early pre-election overview)

We have not looked at Italian politics for a while on our blog, but do not think the Italian political scene has been uneventful, with the general elections scheduled for April (although they could still be brought forward one or two months).

There is still huge uncertainty in Italian politics and one important question remains completely unanswered: will the next Italian government be able to continue Mario Monti's reforms, needed to convince markets and EU partners that Italy can be competitive inside the euro?

As we have argued before, while the short-term risks in Spain relate to banks and funding needs, the trigger points in Italy are largely political.

An overview of where Italian politics is at explains why. Bear with us:

The Five-Star Movement: The one to watch

The Five-Star Movement, led by comedian Beppe Grillo, remains the dark horse - not least since it remains broadly 'anti-euro' and in favour of a referendum on the country's membership of the single currency. Grillo is not himself going to run for Italian Prime Minister. Instead, the party is currently selecting its candidate through a four-day online internal election - with over a thousand candidates taking part in the experiment. Grillo and his grillini are still polling at around 20% but have ruled themselves out of any alliances with the 'old political establishment'.

The question is whether people will actually vote for the party in the end, given that it has said it will not be in government no matter what happens (perhaps not wanting to 'waste' the vote). But if the party does perform according to current polls, expect shock waves through Italian politics.

The centre-left and the alliances dilemma

On Sunday, Italy's largest centre-left party - the Democratic Party (PD) - named Pier Luigi Bersani its candidate, the party's Secretary General, who won the final run-off of an internal election against Florence Mayor Matteo Renzi. Not exactly the 'fresh face' many think Italy needs - he has already served four times as a minister. He is also an old communist.

However, despite his political past, Bersani did push through a couple of laws aimed at opening up certain 'closed' professions during his years as Economic Development Minister (2006-2008), so he may not be all bad news.

Alliances are the real problem for Italy's centre-left, though. It looks certain that Bersani's candidacy will be backed by the smaller Left, Ecology and Liberty (SEL) party - led by Nichi Vendola, the Governor of Southern Apulia region. Vendola has already made clear that he wants to support a government whose agenda "has the scent of the Left". Therefore, his presence in a hypothetical coalition will make it far more difficult for Bersani and his party to pursue the necessary reforms - particularly when it comes to Italy's labour market, which clearly still needs to be opened up.

In addition, according to the latest opinion polls, PD and SEL would together secure around 36% of votes - which means that more allies would probably be needed to form a stable government (unless the existing electoral law remains in place, which may be the case in the end). Bersani has floated the idea of joining forces with Pierferdinando Casini and his centre UDC party. But Casini addresses a Catholic, socially conservative electorate - which does not sit well with Nichi Vendola, who is, among other things, a staunch supporter of gay marriage in Italy.  

The centre and the 'List for Italy': Working for 'Monti reloaded'


Given the difficulties in finding a place in the centre-left coalition, the UDC party is working on a 'List for Italy' along with two other smaller centre parties - Future and Freedom for Italy (FLI), founded by Silvio Berlusconi's former ally, Gianfranco Fini, and Italia Futura, the new movement founded by the Chairman of Ferrari, Luca Cordero di Montezemolo.

The aim is to give Mario Monti a political platform to remain as Prime Minister. This would make Monti a 'phantom candidate'. On paper, this is a smart way to get around the fact that Monti cannot stand in the elections, because, as a 'senator for life', he already has his seat guaranteed in the Italian parliament. However, the latest polls show that, together, the three parties would only win less than 10% of votes. And Monti's support amongst Italian voters is in free fall.

The centre-right: Silvio still hasn't left the building

The fate of Italy's centre-right depends on Silvio Berlusconi's final decision - in case you thought Silvio was going anywhere. Will he run for Prime Minister or not? On this blog, we followed all Il Cavaliere's deliberations closely (see here and here). The Italian press speculates frequently about the risk/chance of Berlusconi announcing a comeback. There are also growing rumours that Berlusconi may set up a new political party.

For the moment, the internal elections to choose the centre-right candidate for Italian Prime Minister have  been put on ice - waiting for Berlusconi's decision. Berlusconi's comeback - given that the guy has so far faced around twenty different trials, a couple of which still under way - would raise a lot of eyebrows but also upset many people within his own party. PdL is also currently polling at less than 15% and seems to be heading for a bitter defeat.

So all of this points to a lot of post-election political uncertainty in Italy - as we have noted before. A new, quite complicated electoral law, that would make 38% of votes sufficient to secure an absolute majority of seats in the Italian parliament, is currently being negotiated and could also change the dynamics (although it is far from certain that the law will be passed).

Four months can be a very long time in Italian politics, so watch this space for further updates.   

2 comments:

Rik said...

A complicated situation in Italy. Monti is probably the by far best candidate for both markets and getting the necessary reforms on the agenda and done. However he lacks clearly sufficient support in parliament to do a proper job.

Hard to believe that Italy will get away with this longer term. The ECB bought some time. But the mechanism that is put into working is that every normal investor will ultimately sell and all Italian debt is likely to end up on the BS of the Italian banks that repo it with the ECB (read ultimately the German taxpayer). The ECB scared speculators away but will not stop normal market behaviour. Which is that normal investors will sell.

Seen from that angle a lot of reform still has to happen.
2 Most likely scenarios imho:
-normal majority government (or minority with split support from non government parties). Doubtful if that will a) be very stable; b) want to go on with the reforms; and c) will be seen as credible in the markets.
Likely will come under both popular and marketpressure the latter combined with EZ.
-Difficulty in forming a normal government and the present situation is continued (technocrats). Like now it will at the end depend on the support that say Monti2 would have. Probably the least painful option if it is allowed to do its work properly. If not it is not much better than a normal majority cabinet only with deferred problems. Monti's credibility isnot eternal.

So basically it is the question will Italy do the necessary reforms without first a shockevent being necessary or not?
If not likely a new technocrat cabinet is the best option and Monti probably the option as PM seen his credibility with the EZ and markets. He simply looks awsome compared to jokers like Rajoy or all things Greek.

Riccardo said...

Italy, the next critical hole in the Eurozone