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Italian elections have triggered fresh uncertainty in the eurozone. What happens next?

26 Feb 2013

Summary: The Italian elections have delivered fresh uncertainty and instability – both to Italian politics and the eurozone. No party or coalition holds a governing majority in the Senate, the upper house of the Italian parliament, and there are no obvious coalitions in the offing. Nevertheless, several leading Italian politicians have over the last 24 hours said that new elections should be avoided. The situation remains extremely fluid.

57% of Italians voted for parties that explicitly oppose austerity and in a major upset, the Five-Star Movement led by comedian Beppe Grillo – who has called for a referendum on whether the country should leave the single currency – received over 25% of the vote. Outgoing Prime Minister Mario Monti’s list mustered less than 10% of votes in both houses. Although Italians remain pro-EU, this election was a major blow for the Brussels cash-for-austerity consensus, and any plans for structural reform in Italy are likely to be put on ice.

How will the seats be divided?

The table below has a breakdown of seats in the two chambers:

Italy’s electoral system gives the coalition or party with the most votes in the Lower House an automatic majority of almost 54%. Bersani's centre-left coalition beat Berlusconi's centre-right coalition to this mark by only around 0.4%. The exact distribution of seats could change as the official, final result is still not in. The breakdown does not include a total of thirteen MPs and 14 Senators who are either elected by Italians residing abroad or in regions following different rules.

Will a stable government be possible and what happens next?

Although Italy has had plenty of unstable governments over the past few decades, this situation whereby it may not be possible to form a new government following an election is new – making the next steps unusually uncertain. In the Italian political system both houses – the Senate and the Lower Chamber – have equal powers, meaning that, usually, a government must enjoy a majority in both to govern effectively and pass laws.  

None of the coalition arrangements entered into before the elections will muster a majority in the Italian Senate – prior to the elections, many had hoped that Bersani’s coalition could get a majority in the Senate with Mario Monti’s support, but the votes did not materialise.

To avoid a situation where Italy is completely ungoverned, there are effectively three alternatives:

  • A national unity government, if Bersani, Berlusconi and Monti join forces – could be possible but may not be enough to avoid snap elections (maybe as early as next year, and after the electoral law is changed);
  • Grillo U-turns and agrees to form a coalition with Bersani’s centre-left alliance;
  • A re-run election (presumably within 3-4 months).

Under scenarios 1 and 3, there will be a lot of pressure to change the electoral law before new elections to avoid a similar stalemate. For that, however, there needs to be a majority in both houses, meaning that we’re looking at a potential Catch-22. This morning, there seems to be a consensus emerging among Italian political leaders, that re-run elections must be avoided. Berlusconi said this morning that a new vote “is not useful” at this stage.

This is broadly the timeline:

15 March: First seating of the Italian parliament (both chambers).

By 20 March: The speakers of both chambers should have been elected.

After 20 March: Italian President Giorgio Napolitano starts official consultations on the formation of the new government. The President usually talks to the leaders of the political groups in the Italian parliament and the speakers of the two chambers. Before that, though, political parties will talk to each other so we may already get a clearer idea (or not) of possible alliances. Bersani is likely to be the first asked to form the new government, as his coalition holds a majority in the lower house.

15 April: Procedures for the election of the new Italian President are due to start (unless he decides to step down earlier, see below).

15 May: Mandate of Italian President expires.

The “institutional traffic jam”

There’s another twist to complicate matters further. Before new elections can take place, the Italian President would have to dissolve the new parliament. However, he is not allowed to do so during the last six months of his mandate (the so-called ‘White Semester’) – and the mandate of President Giorgio Napolitano expires in May. This is known as the ingorgo istituzionale – ‘the institutional traffic jam’.

So even if coalition talks collapsed and new elections were needed, the new parliament would have to elect the new President first – meaning that we would potentially be looking at three to four months of political paralysis. However, the process could be sped up if Napolitano decided to step down earlier.

Who will govern Italy if no government can be formed?

If no government can be formed, the Italian President may appoint a temporary, caretaker government to lead the country until the new elections (which is similar to what happened when Berlusconi resigned in November 2011 and Monti took over). That government, too, needs a majority ‘vote of confidence’ in both houses of the Italian parliament. Until any new government is formed, Mario Monti remains in charge as caretaker Prime Minister, but will be unable to pass substantial laws.

Would a re-run vote generate a different result?

New elections would be a gamble for everyone. Though far from certain, the protest vote could wear off, particularly if market pressure is turned up and the ‘fear factor’ kicks in – this could result in a boost for Monti and Bersani, a possible majority for the two in the Senate. Alternatively, there could well be an identical outcome – and possibly with a further increase in support for Beppe Grillo. Therefore, there are strong incentives to first, avoid snap elections, and second, change the electoral law.

57% of Italians voted against austerity and the ‘Brussels consensus’

The election results landed a severe political blow to the eurozone’s austerity-for-cash blueprint. Five of the seven main parties campaigned on an anti-austerity ticket. Between them, these parties got almost 57% of the nationwide vote in the lower house.  Berlusconi, in particular, received a massive boost in part thanks to strong anti-austerity – at times verging on anti-German – rhetoric. At the same time, Monti – the Brussels and Berlin favourite – got less than 10% of votes in both chambers. This was an almost embarrassing performance.

The table below has a breakdown of votes by individual parties. Beppe Grillo’s Five-Star Movement was the largest party in the lower house, where younger Italians aged 18-24 (who are not eligible to vote in the Senate) can vote.

The Grillo factor

Beppe Grillo’s Five Star Movement received over 25% of the vote – exceeding all expectations. Though Berlusconi and Grillo are both populist and anti-austerity, in many ways, they’re also each other’s antithesis – one representing the old sclerotic system, the other a new, impulsive anti-establishment future. Grillo is clearly a new breed in Italian politics. He has been very critical of Italy’s euro membership, and wants a referendum to decide whether the country should leave the single currency. He’s also suggested that Italy should consider refusing to pay back at least part of its huge public debt.

What will this mean for eurozone governance?

The result undoubtedly makes eurozone governance more challenging, and could complicate relations between Rome and Berlin in particular. It could be far more difficult to get parliamentary approval in Italy for continued EU-mandated austerity and stronger EU oversight powers of national budgets – something that Germany needs as political cover to press ahead with more fiscal integration.

What will this mean for markets and the Italian economy?

There is no doubt that the results inject fresh uncertainty into the eurozone, with markets again set to jump from headline to headline – as so many times before in the crisis. Whether it’s a stalemate, an ineffective grand coalition or new elections, Italy’s economic reforms will be put on hold for a significant period of time.

Although Italian borrowing costs have increased in recent days they remain well below 6% and far from their peak last summer. This highlights that the intervention of ECB President Mario Draghi – via the creation of the as yet untapped OMT programme – played a far more significant role in bringing the costs down than the reform programme of interim Italian Prime Minister Mario Monti. However, a fragmented, anti-austerity Italian parliament could also make it far more difficult for the country to tap the ECB’s OMT. This is because it would need to access the European Stability Mechanism simultaneously, meaning a series of strict conditions – which Berlusconi and others could resist – and approval from several Northern Eurozone parliaments, including from the Bundestag.

For more information, please contact the office on 0044 (0)207 197 2333, Vincenzo Scarpetta on 0044 (0)796 9240642, or Mats Persson on 0044 (0)779 9460691.

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