Italy: To trigger or not to trigger elections – Rabobank

Maartje Wijffelaars, Economist at Rabobank, notes that the Renzi has resigned as party leader, but he is likely to make a comeback in the spring and early elections are in the cards for Italy, although Rabobank believe more likely in the fall than in June.

Key Quotes

“In effect this looks more like a well-planned move, as his resignation triggers the process of party primaries and ultimately elections in April/ May. Renzi himself has suggested 7 May would be a good date. This goes against the demands of left-wing dissidents, who wanted to hold the primaries in December, as planned. Primaries in Spring come too early for the left-wingers to put forward a credible contester to Renzi, who will re-run. With no credible opponent it is almost certain that Renzi will be the one who leads the PD through the next national elections.”

“Elections, and then what?

Assuming early elections, what would be the ramifications for its outcome? Well, nothing to cheer about, we think. Given that major changes to the tweaked Italicum law are unlikely to be implemented before the elections take place, parliament will remain very much fragmented after the next elections. Both within each house of parliament and between both houses of parliament. The latter matters, as both houses have the same amount power.”

“On the bright side, this means that - going by the current polls - an absolute majority for the Five Star Movement (M5S) remains unlikely. The anti-establishment party would need to obtain at least 40% of the votes to acquire the majority premium that will give them 55% of the seats, and recent polls are at less than 30%. But the same holds for any other party. And with the imminent PD split, chances of an M5S election victory are increasing. In a worst case scenario for the country’s political stability, the M5S would win and be able to form a coalition with other Eurosceptic parties like Lega Nord and Fratelli d’Italia. While this is far from our base case scenario, since Beppe Grillo of M5S has ruled out coalitions and the ideological differences between the parties are large, we should not completely neglect the possibility. Together these parties are currently polling at around 45% of seats in the lower house. This could stoke fear that euro membership is at risk. Yet as explained in our piece The Voice of Italy, triggering an euro exit is not that easy for an Italian government.”

“In any case, it is far from certain that whoever wins the elections will be able to form a workable, let alone stable, majority. As such, government efficiency is likely to remain hampered by fragmentation, whilst political uncertainty is likely to remain high. Necessary reforms are unlikely to be completed and implemented and this raises the the likelihood that economic growth will not get the boost necessary to grow itself out of its large public debt stock, which is currently over 130% of GDP.”