Markets will rein in Berlusconi even if he has influence after Italian election

22nd February 2013

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If Silvio Berlusconi stages a mini comeback in the Italian elections a combination of markets, the European Central Bank and the European community will force the former PM and his allies not to backtrack on structural reforms says Schroders.

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.

9 thoughts on “Markets will rein in Berlusconi even if he has influence after Italian election”

  1. forbin says:

    Hello Shaun

    Q: Will contagion from Russia and the Ukraine affect Cyprus?

    A: Regardless of what happens with Russia and Ukraine I think if I was in Romania I’d be more worried !

    Cyprus is on t’ rack alright . leave the Euro ? yes they should but consistantly all the southern european govenments are sold to the devil. They cannot leave because the top will have to loose money and that will never do

    let the peasants eat dirt …….

    If Cyprus followed the Iceland example from the beginning , like Greece should have , then by now they would be better off – instead with a hardening German Euro they will suffer even more

    From the Nutty Boys themselves

    Madness , they call it Madness ….

    Forbin

    1. Anonymous says:

      It’s Lithuania, Latvia and Estonia with sizable Russian minorities ex the USSR that ought to be worried more.

    2. Anonymous says:

      Hi Forbin

      The whole verse seems appropriate for a message from the Euro area political class to Cyprus and indeed Greece.

      “Madness, madness, they call it madness
      Well if this is madness
      Then I know I’m filled with gladness
      It’s gonna be rougher
      It’s gonna be tougher
      And I won’t be the one who’s gonna suffer
      Oh no, I won’t be the one who’s gonna suffer
      You are gonna be the one, you”

  2. Rods says:

    Hi Shaun,

    An interesting comparison between Cyprus and Ukraine and bank runs.

    I wouldn’t of thought there was much Russian or Ukrainian money in Cyprus these days. It has either been used to prop up the Cypriot banks or has been withdrawn as fast as possible. I’ve heard that UAE is a preferred destination these days.

    Russia and the US are always careful not to attack each other directly and quite rightly to, so things don’t get out of hand.

    If Russia annexes Crimea as expected then I think that sanctions will increase the rate western investment money is withdrawn from the country and give it a much harder landing than if they just suffered from investment withdrawal due to US tapering which is affecting many developing countries.

    I suspect Ukraine is going to have a pretty severe downturn with falling wages and high inflation which is not a good combination and there is also an ongoing problem of non-payment of salaries to many teachers and doctors since last October where they are at the bottom of the pile. The Deputies (MPs), military, police, judiciary, administrators and pensioners are all higher up the queue for limited government money.

    1. Anonymous says:

      Hi Rods

      Well according to the New York Times all the Russian money is now coming to the UK.

      “It boils down to this: Britain is ready to betray the United States to protect the City of London’s hold on dirty Russian money. And forget about Ukraine.”

      “The Russians also understand this. They know that London is a center of Russian corruption, that their loot plunges into Britain’s empire of tax havens — from Gibraltar to Jersey, from the Cayman Islands to the British Virgin Islands — on which the sun never sets.”

      http://www.nytimes.com/2014/03/08/opinion/londons-laundry-business.html?_r=0

      I guess there cannot be much money left for Cyprus! More seriously the Russian bear has had plans for Cyprus for a while and whilst it is obviously otherwise engaged right now its gaze will return.

  3. dutch says:

    http://www.ritholtz.com/blog/2014/03/the-worst-bear-market-in-history/

    ‘The Cyprus Stock Exchange All Share Index hit a high of 11443 on
    November 29, 1999, fell to 938 by October 25, 2004, a 91.8% drop. The
    index then rallied back to 5518 by October 31, 2007 before dropping to
    691 on March 6, 2009. Another rally ensued to October 20, 2009 when the
    index hit 2100, but collapsed from there to 91 on October 24, 2013. The
    chart below makes any roller-coaster ride look boring by comparison.’

  4. therrawbuzzin says:

    The sad part is that no-one will be surprised in the least.
    The disconnection between, on the one hand, the political class and financial institutions, and on the other, the population, imv shows that we have entered a form of corporatist electoral dictatorship, whereby all major political parties have, with minor quantitative differences, policies so similar as to make elections a sham.

  5. Anonymous says:

    Hi pavlaki

    Thanks for the link which referred to a story I have been following.

    “Magdalena Álvarez, the Spanish vice president of the European Investment Bank, has been required to post €29m in bail for possible civil liabilities by the judge investigating the so-called “ERE case”, reports El Diario.”

    As yes someone accused of fraud in a senior position at what is the main vehicle these days the European Investment Bank. What could go wrong? Actually the changed role of the EIB is a subject I intend to post on in future.

  6. Anonymous says:

    Hi Andrew

    Sadly both Cyprus and Greece exhibit signs of both disinflation and deflation which are signs of course on an ongoing economic depression. The more general move to lower inflation which was discussed on here from late spring 2013 was missed by the MSM and chattering classes. Accordingly it was yet another “surprise” and has led many to project it “to infinity and beyond” in some sort of panic.

    The strength of the Euro remains a disinflationary influence as does the China inspired drop in copper and iron ore prices. However the price of various foodstuffs has been driven higher by the issues with the Ukraine so the pattern is mixed. If we get low inflation for a bit many Euro area consumers and workers would welcome it…

    The CRB (Commodities) index is in fact up by 6%+ so far in 2014.

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