22nd February 2013
Azad Zangana, European Economist at Schroders says that it is very likely that Pier Luigi Bersani will be Prime Minister at the head of his left leaning coalition.
He writes: “We expect Bersani to become the next Prime Minister of Italy. He will probably have to join forces with Monti’s coalition to take the upper house. This result should help boost the confidence of investors in Italy’s ability to continue along its much needed reforms strategy. Even if the election does not go as smoothly as planned, our view is that volatility in both Italian bond and equity markets represent a buying opportunity.”
“There is a chance that Berlusconi wins an overall majority in the upper house, although that chance is very slim. In that case, he may not be Prime Minister given his agreement with the Northern League, but would still be a very influential minister. In this scenario, Italy may backtrack on some austerity and structural reforms, but ultimately, the pressure from markets, the European community and the European Central Bank would force even Berlusconi’s party to undertake the necessary measures.”
Zangana notes the recently published report by the International Monetary Fund, which suggest that if all previously proposed reforms were to be implemented, along with new labour-market and fiscal reforms, Italy stands to gain over 20% in GDP growth over the next decade (on average 2% per annum). He says the potential to transform the economy from its current dire situation is there but whether Italy’s electorate will deliver a government with the political will to do so remains to be seen.
Below Zangana gives his detailed views on Italian political developments.
Since the start of the year, Berlusconi’s centre-right coalition has seen a small rise in the opinion polls, leading to questions about Pier Luigi Bersani’s ability to lead his centre-left coalition to power. Berlusconi’s gains have been at the cost of Bersani and Monti, as both have seen their coalitions falling slightly in the polls. Italian election rules state that polling must end in advance of the actual election and, for that reason, the results in the chart on the next page show the final results of the polls (using a 20-poll moving average). Note that based on the last five polls run on 8 February 2013, approximately 30% of voters are either undecided, or do not expect to vote. However, this is historically normal if not slightly lower than normal.
Based on the final polls, Bersani still has a comfortable lead, even after adjusting for the 3% average polling error. Bersani should take the lower house with a relative majority, and because of the system employed, which is similar to the UK’s first past the post system, Bersani will have 55% of the seats in the lower house, even if he wins the popular vote by just one vote.
Will it be as clear-cut an outcome in the upper house?
The uncertainty over the elections really only arises over the upper house (senate), where majorities at a regional level matter more than nationwide. However, as the upper house has approximately the same amount of power as the lower house, an effective government needs to control both. As the Northern League (Lega Nord) has recently joined forces with Berlusconi, an overall majority for Bersani now looks less likely.
The key swing states and relevant region are Lombardy, Campania, Sicily and Veneto. The centre-left is very likely to lose Veneto, while polling for Campania and Lombardy is very close (within the margin of error). Sicily is more secure for Bersani. If the centre-left lose two, or worse, three of these four key states (including Veneto), then they are unlikely to secure an overall majority to take the senate. In this instance, Bersani would seek to form a coalition with other parties, with Monti likely to be the first candidate to approach. If the votes secured by Bersani and Monti are enough to secure an overall majority (note that there is no uplift in the same way as the lower house) then they will have secured a working government in both houses. In our view, this is the most likely outcome, although another smaller party may be needed to secure the overall majority.
If, however, Berlusconi wins a larger share of the votes and Bersani and Monti fail to build a coalition with a majority (in other words there is a stalemate), then the President of the Republic (Giorgio Napolitano) would have to decide whether another election should be held, or whether a technical government be installed. The latter would only be in place to allow for laws to be passed that are voted through in the lower house.
There is a chance that Berlusconi wins an overall majority in the upper house, although that chance is very slim. In that case, he may not be Prime Minister given his agreement with the Northern League, but would still be a very influential minister. In this scenario, Italy may backtrack on some austerity and structural reforms, but ultimately, the pressure from markets, the European community and the European Central Bank would force even Berlusconi’s party to undertake the necessary measures.