Markets reacted negatively to news last week that the major political parties in Italy agreed to hold a general election on March 4, 2018, little more than a mere three months away. Investors fear the likely uncertainty after the vote, with polls pointing to a hung Parliament, more political instability, and the possibility of a new election shortly thereafter.
*** While an inconclusive outcome is certainly possible, we are much more sanguine than markets in that we believe the elections are far more likely to ultimately lead to a coalition government with its political center of gravity firmly anchored in the center – along the lines of the 2013 elections. The precise political leanings of this coalition will depend on how well the center-right and center-left perform relative to one another, but at this point it seems fair to say the center-right has a decisive advantage, with former Prime Minister Silvio Berlusconi’s Forza Italia – according to some private polls – projected to win almost 20% of the votes. ***
*** The 5Star Movement is nevertheless likely to be the first party, which will feed trepidation in markets, but as things stand it would still be beaten by a center-right alliance between Former Prime Minister Silvio Berlusconi’s Forza Italia, the Northern League, and the extreme right Brothers of Italy, now polling at a combined 36% against the 5Star’s 28%. That means the center-right, under the shadow of a resuscitated Berlusconi, and not the 5Stars, will have first shot at forming a government. ***
*** But since we do not expect even a combined center-right to come close to winning an absolute majority, talks with the center-left Democratic Party (PD) will also likely be needed,which will put current Prime Minister Paolo Gentiloni as a leading contender for the Premiership in the event of a grand deal. This is an outcome we believe investors should give serious consideration to. ***
Wargaming Coalition Options
We hear other leading contenders for Prime Minister should a grand coalition be formed include Economy Minister Carlo Calenda, currently in charge of some critical economic dossiers, and European Parliament President Antonio Tajani.
Our understanding, however, is that Berlusconi may prefer for Tajani to remain in Brussels to assuage EU fears of a center-right government that is likely to include the more populist and Euroskeptic Northern League. Pointedly, Northern League leader Matteo Salvini has talked a lot about leaving the eurozone, though it is fair to say his party has already shown, during its last tenure in government between 2001 and 2006, that it usually barks more than it bites.
Berlusconi is also said to have mentioned in private to his friends and political acolytes that he thinks he could become Prime Minister himself if the center-right coalition were to win an absolute majority. But given that his ban from public office only expires in 2019, even in the event of a clean victory of the center-right – which is highly unlikely – his shot at the premiership is close to zero.
Political sources do point out that a judgement by the European Court of Human Rights on Berlusconi’s public office ban is expected to come out in May or June of next year. The tycoon might be tempted to flip the tables if the ruling were to come out favorable to him, but we think even that would not be enough to push him back to head of state.
On the other side of the aisle, former Prime Minister Matteo Renzi’s center -left PD is currently in third place, behind 5SM and FI, polling at around 23%, and we believe unlikely to catch up. The PD has been shattered by a scandal related to covert efforts by Undersecretary to the Prime Ministry Maria Elena Boschi, Renzi’s close political ally and personal friend, to devise a bailout of Banca Etruria, whose senior management included her father.
The PD has also recently lost some of its historical leaders such as Massimo D’Alema and former secretary Pier Luigi Bersani, who went on to create the far-left “Free and Equal” Party. That will surely mean less votes for the PD – around 6-7%, already factored in the polls – but will also crucially lower opposition within the remaining, more centrist, PD to striking a deal with Berlusconi.
Finally, we would dismiss the idea, which some analyst have floated, that President Sergio Mattarella will be given extraordinary powers as extended to former President Giorgio Napolitano in 2013 – who chose at least three ministers in then Prime Minister Enrico Letta’s government – in order to thwart the 5SM and provide cover for the grand coalition. This time around, whatever the polling results, the post-electoral process will be firmly controlled by the major political parties, and will not be turned over to the Presidency.