Italy: The Outlook For 2013

Italy will be back at the centre stage of the eurozone crisis, as the country gears up for a general election in early 2013. Prime Minister Mario Monti announced on December 10, 2012 his resignation once the 2013 budget law is passed, following h

is predecessor Silvio Berlusconi’s decision to once again run for Prime Minister. The general election is now likely to be held by late February, more than a month ahead of schedule, jeopardising the passage of several pieces of legislation including changes to the tax code and electoral reforms.

Our core view remains that a centre-left government led by the Democratic Party (PD) will form the next government, safeguarding Monti’s reforms to date. The PD has yet to set out its manifesto, but we expect the party to adopt a moderate and modestly pro-reform platform. The PD’s recently elected leader, Pier Luigi Bersani, is a former communist, but he has publicly committed himself to maintaining Monti’s fiscal austerity drive, and he has a pragmatic record, having attempted to open up ‘closed professions’ during his previous stint in government (2006-2008). Nonetheless, we emphasise that the political outlook is uncertain given that nearly half of Italian voters are undecided or unwilling to vote.

Despite heightened political risk over the coming months, Italy’s fundamentals do not justify a bailout. The government has already implemented significant fiscal consolidation, and the debt-to-GDP ratio would have peaked in 2013 without Italy’s contribution to eurozone bailout funds. However, the run-up to the election will be volatile for Italy given that its large public debt load leaves the economy vulnerable to crises of confidence, while populist rhetoric is likely to pick up ahead of the election.