Political crisis in Italy may significantly worsen economic climate in EU

March 14, 2013 1:54 pm

italyItalian center-left coalition led by Democratic Party leader Pier Luigi Bersani won control of the lower house with 29.54%, narrowly beating the center-right bloc led by former Prime Minister Silvio Berlusconi, which was supported by 29.18% of voters. However, no party has a majority in the Italian Senate and this, in particular, challenges forming of a new government.

“It is clear that those who cannot guarantee the governability of their country cannot say that they have won the election. We did not win, even though we came first,” Pier Luigi Bersani commented on the election results.

Italian experts believe that one of the possible ways out would be an alliance between the supporters of Pier Luigi Bersani, or Silvio Berlusconi and members of Five Star Movement, which has received support of 25.55% voters. However, the leader of this political force, satirist and blogger Giuseppe Piero Beppe Grillo ruled out joining any government alliance.

According to Silvia Francescon, the Head of the Rome Office of the European Council on Foreign Relations, this Italian parliamentary election shapes the future of one of Europe’s biggest economies, and investors are watching closely because the decisions that Italy makes over the next months will have a great impact on whether Europe can definitively unravel the financial crisis.

“Italy’s economic ills are not those of others like Greece, Ireland or Spain. Although it has the eurozone’s biggest stock of public debt, at almost 130% of GDP, its budget deficit is quite small. It has not experienced a property or asset-price bubble. Its conservative banks have been mostly well-regulated; none had to be bailed out in the financial crisis,” the analyst reminded in an interview with news agency “PenzaNews.”

In her opinion, a “medium-size power,” such as Italy, can be one of the leading countries in determining EU policies, but only in the presence of clear goals, credible actors, and reliable strategies. Without these factors, the nation’s influence will be strongly diminished, if not entirely irrelevant.

“Beppe Grillo’s presence in the next Italian parliament might have an impact on Italy’s role in Europe. He has said that Italy should hold a referendum not only on euro membership, but also on the restructuring of its huge public debt. Dealing with such an unpredictable opponent will be a new challenge for the new government, whatever shape it takes,” Silvia Francescon noted.

Meanwhile, the expert considers re-election to be the worst scenario for Italy and the eurozone.

“Re-run elections mean at least two-three more months of political inactivity and, potentially, huge market pressure – which Italy can hardly afford. Also, the risk of contagion to other struggling eurozone countries would be significant,” she explained.

According to the analyst, in terms of repercussions on foreign investment and on the EU fellow countries it is important to see how the foreign press is covering the Italian election. For instance, the Guardian wrote that the result “threatens to reignite the euro’s instability after months of relative calm”, while the Financial Times fears that “widening spreads will add to stress on corporate Italy, especially its backbone of small businesses, as the cost of credit rises”. In France, Le Monde underlines Beppe Grillo’s success saying that this election imposes a political impasse. In turn, well-known economist Paul Krugman said that “even if the nightmare of a Berlusconi return to power fails to materialize, a strong showing by Mr. Berlusconi, Mr. Grillo, or both would destabilize not just Italy but Europe as a whole.”

At the same time, according to Silvia Francescon, the key question is whether Italy can have serious structural reform. Investors are worried but are waiting for the country to work towards smoothing austerity measures and aiming for growth.

“Beppe Grillo has indicated that he believes the next government will last no more than six months. But he knows that with his support the center-left might be able to implement a package of policies before running other elections. Some of the activists of the Movement have been signing a petition circulating on the web in the last days asking him to ally with Bersani to implement a small amount of necessary policies. This compromise, if it ever takes place, might not last long,” she said.

In her opinion, President Napolitano can play a fundamental role in seeking way out of vote impasse, as he will have to work together with Pier Luigi Bersani, Silvio Berlusconi and Beppe Grillo.

“Bersani has an opportunity to show leadership, and if he receives the mandate from Napolitano he needs to put down a 10 actions pier bersaniprogram on which he can find the majority to present to the parliament. He needs to implement it. He might not last for five years but still he might be remembered for having changed the country, which in my opinion is much more important than seat on the PM chair for five years and not be able to do anything,” Silvia Francescon said.

In turn, Pepe Egger, the Head of Western Europe Forecasting at Exclusive Analysis political risk firm recently acquired by IHS, suggested that one of the most crucial challenges for the next Italian government would be to reduce public debt, the size of which represents a major drag on growth and a dangerous vulnerability to exogenous shocks.

“Servicing the debt at present costs 5% of GDP and eats up some 10% of total government spending, constraining room to maneuver for any future government despite generating a primary surplus,” the analyst explained.

In his opinion, following the inconclusive elections, the next government is unlikely to be sufficiently credible to reassure creditors that it can meet the terms of a financial rescue program should that become necessary.

“Therefore, the current political crisis could possibly herald a return to the kind of financial instability that led to government collapse and deepening of the eurozone crisis in late 2011. Indicators that Italy is heading in this direction include the failure to form a government by end-March, collapse of a new government within six months or a significant decline in the demand for Italy’s bonds during auctions in the next three months,” the expert noted.

However, he sees new elections as a low probability in the three-month outlook.

“A new election is only likely to take place after several months of uncertainty and another electoral campaign,” Pepe Egger emphasized.

He also added that returning to the electorate would be a high-risk strategy for both Pier Luigi Bersani and Silvio Berlusconi, since they risk Beppe Grillo scoring an outright victory.

“Beppe Grillo is less likely to win elections unless such an election is called as soon as possible. I foresee Grillo’s performances revealing his party as a one-man show with no real policy platform and few capable personnel to deliver. This is likely to push his supporters to return gradually to their traditional parties and political bases,” the analyst said.

Pepe Egger noted that regardless of the outcome of negotiations on a future government all the possible scenarios suggest that Italy is unlikely to be able or willing to comply with EU-mandated policy pledges.

“The factors that have helped Italy reduce the adverse sentiment in bond markets over the course of 2012 are now less relevant following the inconclusive elections. The kind of consensus formed under Mario Monti’s leadership for austerity and structural economic reform is unlikely to hold. Italy’s creditors are, therefore, likely to focus on whether they can depend on an ECB bond buying program as a backstop should Italy’s financial outlook deteriorate. But the high likelihood of an unstable or ineffective government would make the Italian government a less credible partner for the Eurogroup and ECB to negotiate with on the terms and conditions of such an ECB bond buying program. Even if I am wrong on this point, the uncertainty is likely to drive renewed market aversion towards Italy,” Pepe Egger said.

Meanwhile, Evgeniya Vojko, foreign policy expert of the Russian Center of Political Conjuncture reminded that Italy is in a prolonged crisis.

“This situation is not something exclusive to the country, which is confirmed by the dismissal of many prime ministers, including Romano Prodi and Silvio Berlusconi,” she explained.

From her point of view, economic developments impose a serious impact on the political situation in the country.

“I believe that the current political uncertainty is largely a consequence of economic turbulence in Italy and the EU. Italians still cannot find a compromise solution, which would be acceptable to Italian political parties and the European elite,” said the expert of the Russian Center of Political Conjuncture.

She added that political developments in the EU, especially parliamentary elections in Germany and the European Union, would be of particular importance for Italy.

“The economic and political climate in Italy will largely depend on Germany’s role in the economic arena of Europe and on the mechanisms chosen for stabilization of the economic situation in the eurozone,” Evgeniya Vojko explained.

Meanwhile, in her opinion, the situation in Italy is complicated by a number of unsolved social problems.

“The country’s unemployment rate is one of the highest; classic conflict between local residents and migrants now becomes more vivid. Many people from Libya, Tunisia and Egypt moved to Italy, which resulted in the growth of internal tensions. Against this background, the political uncertainty can be prolonged due to the lack of common vision of migration problem and Italy’s membership in the eurozone,” the analyst noted.

Moreover, according to her, Italians used to rely on social support from the government, which cannot be provided now.

“However, this situation will not create any serious crisis or some kind of collapse. Either way, Italian political forces will come to agreement,” said the expert, suggesting, however, that the coalition will not be stable.

“I do not rule out the possibility of re-run elections or appearing of a new candidate for prime minister because at the moment there is no common vision of Italy’s domestic policy development,” Evgeniya Vojko concluded.

Full text news agency “PenzaNews”: http://penzanews.ru/en/opinion/53159-2013

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