Italy could do with market pressure

By Hugo Dixon
April 15, 2013

Italy could do with some market pressure. Rome’s bond yields are now lower than they were before February’s inconclusive election. But as the politicians scheme, the economy burns. With markets calm, there is insufficient urgency to crack on with long-needed economic and political reform.

The fall in 10-year bond yields, which were 4.3 percent on Friday compared to 4.4 percent just before the election, is attributable to two factors. First, nobody wants to bet against the European Central Bank which has promised to do whatever it takes to preserve the euro. Second, the Japanese central bank’s pledge to buy gigantic quantities of bonds at home has buoyed asset prices elsewhere, including in Italy.

The backdrop to the current political crisis is starkly different to that in November 2011, when a sharp increase in bond yields created a panic which led to Silvio Berlusconi being forced out of office. Now none of the three main political blocs – Berlusconi’s centre-right group, the centre-left Democrats and Beppe Grillo’s 5-Star Movement – can govern on its own. But seven weeks have been wasted without a coalition being formed.

Action has now turned to selecting a new president to replace Giorgio Napolitano. An electoral college made up of parliamentarians and representatives from Italy’s regions will on April 18 start the process. The machinations are highly complex, as I discovered in Italy last week, and could yet unblock the situation. But there are many potential pitfalls.

The role of Italian president used to be a largely ceremonial one. But its power has grown under Napolitano who showed how the president could steer the country in a political crisis, for example by replacing Berlusconi with the unelected Mario Monti.

The Democrats have virtually enough votes to appoint their own candidate, somebody such as former Premier Romano Prodi, as president. But they know that this would produce a violent reaction from Berlusconi, leading to new elections. And while there is something to be said for returning to the ballot box, the Democrats’ current leader Pier Luigi Bersani, who performed badly in the last campaign, would not stand in such an election. So he has an incentive to hang onto power by cobbling together some sort of deal.

Bersani’s first hope was to form an alliance with Grillo or some of his supporters, the so-called Grillini. But Grillo has refused to do any deals and the Grillini have refused to be divided too. Meanwhile, Berlusconi is prepared to form a grand coalition with Bersani, but the latter fears this would split his party, many of whom detest the former.

Hence, the manoeuvring over the president. The idea is that if the Democrats agree to a candidate that Berlusconi doesn’t actively object to – somebody like Giuliano Amato, another former prime minister – it might be possible to form some sort of government that isn’t quite a grand coalition.

One option is a minority government led by the Democrats, who are the largest party, which Berlusconi would tacitly support. Another is a so-called president’s government, where the new president would pick his or her own candidate and try to persuade the Democrats and Berlusconi to fall into line.

If the new president had been jointly chosen by the two blocs, the hope is that this might work. In one variation on the theme, Napolitano himself – who is respected across the political spectrum – might be persuaded to continue as president. But the 87-year-old is resisting the idea on the grounds that he is too old.

Even if some government can be stitched together, there’s no guarantee that it can last long or achieve much. Berlusconi would be free to pull the plug whenever he wished.

The only thing that might stop this is the fear of new elections. This might seem odd given that opinion polls now show Berlusconi ahead of the centre-left, albeit not far enough to win an outright majority. SWG has the centre-right 3 points more than the centre-left; Ispo has it 0.3 percentage points ahead.

But Berlusconi’s slim lead could easily melt away given that the Democrats would probably replace Bersani as their candidate with Matteo Renzi, the popular centrist mayor of Florence, in any new election. Renzi, who is a sort of Italian Tony Blair, could probably win votes from Berlusconi, Grillo and Monti’s centrist movement.

Indeed, this is why new elections might be just what Italy needs. Renzi is a fresh face who is promising to reform politics and the economy.

But there are also potential pitfalls with this scenario. For a start, Renzi is reviled by some on the left of his party. If he’s chosen as their candidate, the Democrats could split, robbing him of a majority. Then there’s the fact that he has never run anything substantial. It’s one thing to make good speeches; another to govern in a recession when virtually every decision will be unpopular.

Finally, the whole process of choosing new leaders, calling elections and forming a new government could take another six months. Meanwhile, the economy is shrinking. Government debt is officially forecast to hit 130 percent of GDP. There is a risk that it could rise further, especially if taxpayers have to pump capital into the banking system and the recession continues.

One almost wishes that bond yields would rise to prod politicians to get a move on.

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