Polls ahead of the elections
General elections in Italy will be held on 4 March. The date of the election is just about the only certainty we have at the moment. Polls still suggest that the most likely outcome is a hung parliament. The centre-right coalition is leading the race (Forza Italia (FI), Berlusconi’s party, Northern League, its main ally and Brothers of Italy, with a percentage that is fluctuating between 35% and 39%) and actually gained some traction recently, but it still appears to be below the 40% level that could guarantee a coalition with an outright majority. The populist, and non-Europe friendly M5S will likely be the first individual party, winning between 26% and 29%, but they claim that they will not try to form ex-post coalitions in order to form a government; it must be also said that they have significantly toned down their statements on the Euro-Europe membership. The left is divided in this election and Renzi’s Partito Democratico (PD) is credited with 22%-25%, reaching as high as 25%-28% when combined with some small allies. There is a slim possibility that with the combination of the first-past-the-post and proportional representation systems in the new electoral law, the centre-right will manage to get an outright majority, but, still the most likely result is one in which none of the three main groups will be able to form a government.
What can follow is not obvious, but Italy is quite accustomed to being led by a “non-political” government, meaning a government that is the direct outcome of the electoral result. Hence, President Mattarella will try to find a possible agreement among the contenders and establish a new government.
Also at the moment, market sentiment is somewhat in a state of benign denial of risk: the Italian equity market is outperforming Europe (YTD the FTSE MIB is up 5.2% vs. -1.1% for the EuroStoxx, mainly thanks to the small- and mid-caps segment that is benefitting from the fiscal incentive for investors); the BTP-Bund spread is relatively anchored, averaging 145 bp since November 2017 (but has fallen below 130 bp in the last two weeks despite the market turbulence and the increase in the Bund yield).
Politics and electoral manifestos
It is difficult to summarise the parties’ main proposals; but let’s try to focus (on the main three blocks) on those that are more publicly stated and that are likely to have a greater impact on the economy.
As the election date nears, some contenders are toning down their rhetoric on some of their more radical issues. M5S seems to have considerably softened its position on Europe (until a year ago they claimed they would have called for a referendum on the Euro) and on the possibility of looking for allies. In the same vein, Mr. Berlusconi softened his stance on the 2012 Pension Reform (Fornero’s law), but his position clashes a bit with his main ally, the NL, which is maintaining a tough stance in that regard.
Needless to say, a lot of these issues are somewhat at odds with the fact that Italy must (the country has no choice) maintain a sizeable primary balance and must hope to be able to maintain a decent growth path in order to reduce public debt.
The economy is doing well. Apart from some (natural) volatility, it seems that growth of 0.3-0.4% per quarter is affordable, and this is good news for a country where Total Factor Productivity declined over the 1995-2016 period. In a recent thematic paper (Italy: back to growth3), we tried to investigate the reasons that justify the claim that something is structurally improved and the renewed competitiveness of Italian products is probably the best “quantitative” indicator for that. In 2017, the trade balance with countries outside the European Union was a surplus of €39.2bn, in line with 2016’s figure, but net of energy related products it hit €71.9bn compared to €65.6bn previously, despite the fact that domestic demand was stronger than last year. With confidence at a high level and manufacturing firms’ order books in a strong position, it seems likely that the positive momentum will continue in 2018.
There is a lot of uncertainty surrounding this election. The electoral programmes are not entirely reassuring. However, it must be acknowledged that contenders are reducing their sharper angles and that the most likely result is still one in which there will be a sort of technical government or a grand coalition government. Considering that the economy is performing nicely, it is difficult to think that any government that takes charge after 4 March will radically change something that is doing reasonably well.
1. Here it is the one calculated by http://www.policyuncertainty.com/
Polls still suggest that the most likely outcome is a hung parliament.