Italy In The Spotlight But For All The Wrong Reasons

On Saturday 8 December, Mario Monti announced his decision to step down as Prime Minister (PM) after the 2013 budget bill is passed, probably before Christmas. This decision came after Il Popolo della Libertà (PdL, centre-right), one of the main parties supporting the current government, heavily criticised what the Monti administration had achieved. By implication, it de facto withdrew its support for the technocratic government. In addition, a few days earlier, the party leader and former PM Mr Berlusconi had announced his intention of running again for the premiership in next year’s general elections.

This sudden re-emergence of political tensions was unexpected since President Giorgio Napolitano had been able to restore some calm in previous weeks. From an electoral standpoint, the PdL’s decision may have several advantages. The current parliament will remain in session until early April 2013, unless it is dissolved earlier.

With just a few months left until the general election, the parties that have been losing ground in the polls (the PdL was one of these) are running out of time to regain popularity. Embracing an anti-austerity and fairly populist stance, Mr. Berlusconi wants to distance his party from Mr Monti’s cabinet, by capitalising on the anti-austerity sentiment running high in Italy after one year of belt-tightening measures.

Secondly, the PdL may benefit from bringing forward the general election. In February, some important regional elections are due to be held in Lazio (where Rome is located) and Lombardy (where Milan is located), where centre-right administrations collapsed after the eruption of political corruption scandals. Poor results in the regional elections could have negative implications for the parties running in the general elections just a few weeks later.

Political instability and uncertainty is something that markets do not like. On Monday, the Italian stock exchange fell by around 3% and the yield on the 10-year Italian bonds rose by around 30bp. Markets remain worried about Italy’s willingness to implement all the measures adopted by Mr. Monti’s administration over the past year. Indeed, Mr. Monti managed to restore Italy’s credibility.

The country was suffering from a high level of public debt and low growth, which pushed the economy into a negative spiral (a bad equilibrium) of higher interest rates, more severe business contractions and surging debt ratios. The measures adopted by Italy under Mr Monti’s leadership, in conjunction with all the measures taken at EU level, had been bearing fruit. Since March 2012, interest rates have eased considerably, and there were also signs that confidence is returning. Non-resident holdings of public debt have increased, although moderately.

The tone of the political debate suggests that the election campaign will be very fiercely contested. In this environment, the markets fear that the general election will not deliver a clear winner able to lead Italy further along the path set by Mr Monti. Nevertheless, an early election is not necessarily bad news. Firstly, voting just one month earlier (mid-February is a possible option) does not change the outlook significantly. The majority coalition currently supporting Mr. Monti is highly diverse. In recent months, the government has struggled to implement its policies. Early elections may thus bring clarity rather than confusion.

In addition, there is a general understanding among voters at large and the political classes of what Italy needs. Though tough, adjustment measures have been widely accepted without the social tension seen in other countries. What’s more, according to the latest polls, the next general election seems likely to deliver a solid market-friendly majority.

The Partito Democratico (centreleft) led by Pier Luigi Bersani, a former development minister in Prodi’s government in 2006, who launched a drive to deregulate numerous services, holds a big lead in the opinion polls and should be able to form a solid majority with the backing of the SEL party (left wing, ecologist party) in both chambers of the Italian parliament.

Some parties are putting pressure on Mr. Monti to run as Prime Minister, keeping to some extent the experiment of a technocratic government going. Nevertheless, it should be better for Italy to have a clear political majority established by an election, as it demonstrates to the markets and international community that the emergency period that brought a non-elected technocratic government to power is over. Mr. Monti’s participation in Italian political life is unlikely to end in the coming months.

There is a growing consensus that Mr. Monti is a potential candidate to replace Mr. Napolitano (whose term will end shortly) as President of the Republic. Another possibility is that Mr. Monti will be appointed as finance minister. Lastly, anti-austerity and populist stances are not paying dividends. Mr. Berlusconi has been heavily criticised both domestically and by the international community and has started to moderate the tone of his message.

All in all, Mr. Monti’s unexpected decision to resign as Prime Minister made the financial markets nervous about Italy’s ability and willingness to move further along the road of reform initiated by the current administration. Even so, early elections also bring certain benefits. The diversity of the coalition supporting the Monti cabinet was certainly slowing down, if not blocking its political efficacy. According to the latest opinion polls, a market-friendly government with a solid majority in both chambers of parliament may well take shape in the forthcoming general election.

By Clemente DE LUCIA