Italians will be heading to the polls today to elect the country’s Parliament. Here’s what we believe investors should focus on.
– Investors should not expect to know who will lead the new government and under what Parliamentary majority on Monday morning, except in the unlikely event of the center-right winning an outright majority, in which case European Parliament President Antonio Tajani would be the Prime Minister (see SGH 12/19/17, “Italy Elections: A Blazing Berlusconi Comeback”). In 2013 it took roughly two and a half months for Prime Minister Enrico Letta to get his confidence vote, and it should not be that different this time around time wise.
– President Sergio Mattarella will meet with and listen to all parties before making a decision on who to appoint as Prime Minister, a long, tortuous path that will likely lead to a compromise choice. On that note, that party leaders are running as alleged Prime Minister candidates is irrelevant: with a proportional-based system, the government is built after the vote.
– There will be some market turbulence if the 5Star Movement’s result has a 30 handle on it, which is within the range of possibility even though the central tendency is more like 27-28% – corresponding to 165 to 170 seats. But even then, the Movement won’t be able to go it alone, and will have to choose whether to remain in the opposition or participate in a coalition government.
– The Berlusconi-led center-right alliance is projected to win between 275 and 295 seats, while the center-left alliance built around the Democratic Party is likely to obtain between 140 and 150 seats.
The Possible Scenarios
– With the exception of a center-right outright majority, all bets are on. Even a center-right majority, at this point unlikely given the current poll numbers, could be short-lived given the level of internal infighting shown during the campaign.
– President Sergio Mattarella is said to have already ruled out endorsing any kind of populist, extreme-right coalition, regardless of the numbers. Given his powers – Italy is a Parliamentary Republic and he is the one in charge of appointing a Prime Minister – we would not give an alliance of Northern League, Brothers of Italy and 5Stars any serious chance of success.
– There is still a small chance of a wide majority government – in Italian jargon, “the government of the President” – gathered around a “minimalistic” program – usually the new electoral law – which would bring the country back to the polls within a few months: however, in Italy there is nothing more lasting than the provisional and such a technical majority could quickly become political.
– A grand coalition, while at this point seemingly an outlier because of the poor poll numbers showed by the PD, could still happen if both the PD and Forza Italia overperform, and if their close allies (Raffaele Fitto’s “Us with Italy” and Emma Bonino’s “More Europe”) pass the 3% threshold. That coalition could be bolstered, over time, even by factions of some of the opposition parties: the Northern League MPs elected in the South, in addition to some of the newly elected 5Star Parliamentarians, namely the ones eager to keep their full salary.
– More in general, investors should keep in mind that Italian MPs are not bound by their electoral mandate and can – and often do – switch sides when promised a minor government post or other benefits in kind. This is particularly true when the electoral system is a proportional one, and makes government formation slightly easier than the currently deadlocked numbers would suggest.
– Markets should however be aware that while Italy is likely be able to form a stable government with a working majority, its compromise nature will make it virtually impossible for it to do anything disruptive. Expect in any case a moderately expansionary fiscal policy focused on handouts, as well as the protection of homeowners and a lot of focus on pensioners.
The 5Star Question Mark
– Under its current leader Luigi di Maio, the 5Star Movement has been positioning – with some success – to claim a more active role in the government formation process. President Mattarella is said to be more open to that than former President Napolitano, and the list of ministers that the Movement presented last week, while merely virtual, includes some remarkable names – the finance Minister, for example, is a Professor at the elite economic school Sant’Anna of Pisa.
– The party is still currently split between those who want to stay “pure” and not lose the Movement’s political virginity, and those who believe it would be stupid not to reach out to moderate forces such as part of the PD and the left. Di Maio himself, leading the more moderate faction, really feels this could be the occasion of a lifetime.
– We feel markets should not fear the 5Star as a disruptive force, but rather see as a positive its inclusion within the “constitutional arch,” which is inevitable at this point especially if the Movement scores more than 30%. And even if it will stay out of power this time around, a party that represent a third of the population, in a proportional electoral system, is there to stay, so President Mattarella could well consider that for both tactical and common sense reasons it should allow it to play a part in ensuring the country’s stability.