19 März 2018, 17:24 GMT
This content was first published on 5 February 2018
By now, most people agree that a clear winner of the Italian election on 4th March is unlikely due to the new electoral system. A probable hung parliament will create the necessity of broad coalition talks.
However, it’s an Italian election and there is always the risk of surprises. For instance, it could be a right-wing victory with Berlusconi (ousted from Parliament and barred from holding office until 2019) potentially one of the main stakeholders and likely kingmaker. The Five Star Movement (M5S), which received a lot of press coverage over the past few years due to their populist manifesto, has taken ground from Berlusconi, especially in the south of Italy. But an outright victory of M5S would still be difficult to achieve under the recently reformed electoral law.
How is this election different?
This will be the first Italian election where a "uninominali" (first past the post) system will be used together with a proportional system. This has two important consequences. Firstly, MPs who are elected with the first past the post system could be more independent from party direction, increasing scope for changes of party allegiance after the election, more so than in previous elections. Secondly, it makes coalitions more likely.
What happens if there is no clear winner?
A coalition would be likely. The lengthy political horse trading will start right away and the first milestone will be the election of the presidents of the chambers within a couple of weeks. The names chosen will indicate where coalition talks are going.
In such a scenario, it’s unlikely any party would be willing to step up and take the mandate from the president to form a government as several compromises would have to be made. As a result, a coalition of the largest parties - Democratic Party (PD), Forza Italia (FI) and M5S - would be the most obvious partnership. Strategically this may not prove a wise move for the M5S, who have won over voters predominantly with their anti-establishment profile and their unwillingness to “collude” with traditional political parties. However, it could signal the beginning of a new phase for the movement, shifting it towards a mature political force.
Impact on markets
Our base case remains for a benign, market friendly outcome. However, with the elections now just over a month away, I’m going to be closely watching M5S as we believe they are more willing to form broad coalitions than the market currently assumes. It should mean that the tail risk of a core-populist led government is smaller and the odds are tilted in favour of a more responsible outcome. Having said that the probability of the most market friendly outcomes (FI+PD or a centre-left only) remains on the low side. In the short term, this caps the upside on BTPs in our opinion, and it remains to be seen whether M5S can elevate from pure populism or whether they will be another leopard that cannot change its spots.
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