Post-Election Gridlock: The Next Steps
BMI View: Italy's political scene is entering a period of heightened instability following an inconclusive election result , and this will negatively impact financial markets . The formation of a broad coalition is still possible, but such a government would struggle to find coherence in its policies. Therefore, we see a high possibility of another general election before the end of 2013 .
Italy's political scene is entering a period of heightened instability and uncertainty following an inconclusive outcome of the general election held on February 24-25. The result is being viewed very negatively by financial markets, with the Italian 10-year bond yield jumping by 45 bps to a 2½-month high of 4.94 % at one stage, before settling at 4.81%. T he euro slid to a six-week low of US$1.3018/EUR, before edging back to US$1.3089/EUR.
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As expected, Pier Luigi Bersani's Democratic Party (PD)-led centre-left alliance won the largest number of votes (29.54%) in the race for the Chamber of Deputies, which will give it a majority of 340 seats in the 630-member lower house. However, it failed to win a majority in the 315-member Senate. In Italy, the Senate holds virtually equal power to the lower house, meaning that prime ministers need the support of both chambers to govern. The PD-led alliance appears to have emerged as the second-largest block in the Senate, with 31.63% of the vote and 113 seats, but this is far short of a majority (158). Although the centre-left's shortfall in the Senate was widely anticipated, pre-election speculation had focused on the PD forming a coalition with outgoing Prime Minister Mario Monti's centrist Civic Choice (SC) party. However, the SC performed poorly, meaning that such a tie-up would still lack a Senate majority.
The centre-right People of Freedom (PdL)-led alliance spearheaded by former prime minister Silvio Berlusconi did better than expected, winning 29.18% of the votes for the lower house and 30.72% for the Senate. This has resulted in 124 seats in the lower house and 116 in the Senate. The biggest 'surprise' winner overall was the Five-Star Movement (M5S) party led by internet activist and former comedian Beppe Grillo, which won 25.55% of the votes for the lower chamber (where it will have 108 seats), thus becoming Italy's most popular single party. It won 23.79% of the votes for the Senate (where it will have 54 seats). Its strong showing demonstrates the discontent that many Italians feel with the country's traditional political parties for reasons ranging from austerity to corruption. M5S and the PdL's successes also underscore Italians' weariness with what many view as Germany-inspired austerity measures. The big loser was Monti's SC-led bloc, which won only 10.56% support in the lower house race (45 seats) and 9.13% in the Senate election (18 seats). Monti's technocratic government replaced the Berlusconi administration in November 2011 and remains well respected by financial markets, but his austerity measures are blamed for prolonging Italy's recession. ( For background to Italy's political system and parties, see February 18, 2013, '2013 Election Primer: Parties, Policies, And Scenarios'.)
Complex Coalition-Building Attempts Ahead
Parliament will convene on March 15. Over the coming days and weeks, we expect the PD to attempt to form a viable coalition so that it can gain the Senate majority needed to govern. However, this will not be easy, and it is unclear who it could join hands with. At present, a grand coalition between Bersani's PD and Berlusconi's PdL would appear to be unlikely, given that the parties are bitterly opposed to each other, and a pact between them would not last long. Moreover, the bigger the coalition, the more unwieldy it would be, and the higher the risk of extended gridlock. The PD could also attempt to attract the support of M5S, but the movement is reluctant to join forces with a traditional party for fear of compromising its anti-establishment message. Yet if M5S chooses to remain completely separate from governance, it would risk losing relevance over the longer term. Thus, M5S also faces a dilemma on how to build on its success.
New Election Likely
Given this backdrop, we believe that Italy may need to hold another general election before the end of 2013 to produce a more decisive result. However, this may necessitate changing the electoral law, which could take time. In the meantime, President Giorgio Napolitano could install an interim government. Therefore, Italy could face months of political uncertainty, which could cause bond yields to rise further and bring concerns about the eurozone's survival back to the top of the agenda. Finally, even if Italy holds a fresh election, there is no guarantee that this would result in a more durable or market-friendly government.