Flash Note Italy: politics

Transcription

1 FLASH NOTE Flash Note Italy: politics Italy back in the spotlight Pictet Wealth Management - Asset Allocation & Macro Research 18 January 2018 The government has confirmed 4 March as the date for the next parliamentary elections. The lower and upper houses will be elected under a new electoral law, the Rosatellum bis law, which is a combination of a majoritarian and proportional system with 37% of the seats allocated via the principle of "first-past-the-post", 61% allocated through proportional representation and 2% reserved for overseas constituencies. Based on the current polls, the only coalition that could aspire to an absolute majority is the centre-right, although they are still short of attaining it. As a result, a hung parliament, at least initially, is a likely outcome given the fragmented political landscape in Italy. We do not think that, as things stand, political uncertainty will lead to systemic crisis. Nonetheless, while near-term risks seem contained, medium-term risk challenges remain. AUTHOR Nadia GHARBI ngharbi@pictet.com Pictet Group Route des Acacias 60 CH Geneva 73 Italian parliamentary elections, scheduled for 4 March, are the next big political challenge facing the euro area. Elections will take place under a new electoral law, which is a combination of a majoritarian and proportional system, with 37% of the seats allocated via the principle of "first-past-thepost", 61% allocated through proportional representation and 2% reserved for overseas constituencies. The law favours parties that form pre-election coalitions and penalises parties that reject coalition. The latest data on Italians political voting intentions (see Chart 1) suggest that support remains quite evenly split between the three main groupings the centre-left Democratic Party (PD), the centre-right alliance (Forza Italia (FI), Northern League and Brothers of Italy (FdI)) and Five Start Movement (M5S). Based on the current polls, the only coalition that could aspire to an absolute majority is the centre-right coalition, although they are still short of attaining it. As a result, a hung parliament, at least initially, is a likely outcome given the fragmented political landscape in Italy. Months of talks will probably follow, before some sort of agreement can be found between Forza Italia and the PD (with support from smaller centrist parties). While the risk that Italy will exit the euro area has significantly diminished, volatility is expected to increase in Italian bond markets in response to the uncertainty generated by strong political fragmentation, but we do not think that political uncertainty will lead to a systemic crisis for Europe. Chart 1: Italian polls on voting intentions in the next general election (as at 17 January) Five Star Movement Democratic Party Forza Italia Lega Nord Brothers of Italy MDP (since December in LeU) Average monthly voting intentions (%) Source: Pictet WM - AA&MR, Various Polls

2 Italian electoral system in brief The current Italian parliament consists of two houses: the lower house, the Chamber of Deputies (6 seats), and the upper house, the Senate of the Republic (315 members). Both houses are elected simultaneously, for the same five-year term and have (almost) the same powers. A government needs the backing of both houses to enter office and must resign if it loses the support of one of them. Moreover, any law/bill initiated by one house needs to be approved by the other in exactly the same terms. This (almost) perfect bicameral system has its rationale in Italian history. After two decades of fascist dictatorship, the 1946 Constitution was designed to ensure that Italy did not drift into dictatorship in the same way that it had after Benito Mussolini s appointment as prime minister in However, having two houses with equal powers has contributed to lengthening or, in certain cases, paralysing the decision-making process. The Italian political landscape is also characterised by a large number of political parties and weak government stability. Since the birth of the Republic in June 1946, the country has had more than 60 governments. In spring 2018, the Chamber of Deputies and the Senate will be elected under the same new electoral law called Rosatellum bis, named after Ettore Rosato, the parliamentary party leader of the ruling PD party, who helped draft the bill. The legislation was agreed in late October 2017 and replaces the Italicum and Porcellum laws. It was supported by the PD, Forza Italia, small liberal parties and the Lega Nord, while the M5S strongly opposed the new electoral law. How does the Rosatellum Bis work? The two chambers of parliament will remain the same size but the way their members are chosen is set to change. The Rosatellum bis law is a combination of a majoritarian and proportional system, with 37% of the seats allocated via the principle of "first-past-the-post", 61% allocated through proportional representation and 2% reserved for overseas constituencies. Parties can stand alone or as part of broader coalitions. Single parties will need to obtain a minimum of 3% of the popular vote to be allocated seats, while coalitions will need to win at least % (originally the threshold was 5%). Regarding diversity, no more than 60% of the candidates on any of the lists may be of the same sex. Unlike the previous electoral law (the Italicum applied in the lower House), the Rosatellum bis does not give an automatic majority to any party or group that wins more than 40% of the vote. The voting bodies and minimum age of voters differ between the Senate and the Chamber of Deputies. In the Senate, seats are assigned based on votes secured at the regional level. The constituencies correspond to Italy s 20 regions, with six senators reserved for Italians living abroad. The voters must be 25 years old to be eligible to vote for the Senate. While in the Chamber of Deputies, seats are allocated at a national level, with the country divided into 28 constituencies. The voters must be 18 years old to be eligible to vote for the Chamber of Deputies. 18 January 2018 FLASH NOTE - Italy: politics PAGE 2

3 Which parties are favoured by the Rosatellum bis? The threshold for first-past-the-post seats largely favours mainstream parties capable of forming alliances before the ballot and penalises parties that reject coalitions. In all constituencies, there will be a particularly fierce battle to win these seats. Therefore, parties with similar ideas will need to run in coalitions in order to avoid splitting their support base and win a large number of constituencies. By contrast, the M5S is reluctant to form any preelection alliance, preferring to poach votes from both left and right. The law also benefits parties that have strong regional powerbases. While very strong nationally, the M5S lacks deep penetration on a local level and sufficiently experienced candidates to compete in single constituencies. The new law harmonises the voting system between the two Houses, apart from some aspects. One of these is the voting age. The Senators are elected only by those over 25 years of age. Given that M5S supporters are overrepresented in the age brackets, M5S s effective support should be lower in the Senate than in the broader population. How might the election turn out? The new electoral system and the fact that 37% of seats are to be allocated on a first-past-the-post system make projections particularly hard in this election. The latest polls (see Chart 1) suggest that support remains quite evenly split between the three main groupings the PD, Forza Italia/Lega Nord/FdI alliance and M5S. The ruling PD party has lost ground in recent months. Several dissident members have abandoned the party to form the Democratic and Progressive Movement (MDP), thus increasing further the fragmentation of the Italian political scene. In December, the MDP formalised an alliance with two other parties (Italian Left and Possible) to form a left-wing party named the Free and Equal (LeU). The key element to watch will be the dynamics between centre-right parties (Forza Italia, Lega Nord and FdI) and what sort of agreement they reach for fielding candidates for first-past-the-post seats. The three parties have divergent views on the euro, with Silvio Berlusconi, Forza Italy leader, saying that Italy should remain in the currency union and Matteo Salvini, the Lega Nord leader, advocating a departure. However, they converge on other proposals such as overturning pension reforms and introduce a Flat Tax regime. Based on the current polls, the only coalition that could aspire to an absolute majority is the centre-right, although they are still short of attaining it. As a result, a hung parliament, at least initially, is a likely outcome given the fragmented political landscape in Italy. Months of talks will probably follow, before some sort of agreement can be found between Forza Italia and the Democratic Party (with support from smaller centrist parties). In the event of complex negotiations between parties, the outgoing Prime Minister, Paolo Gentiloni, would help guarantee political continuity between legislatures. This should help contain concerns, at least in the very near term, while also buying time to try to resolve the situation. 18 January 2018 FLASH NOTE - Italy: politics PAGE 3

4 How likely is it that Italy will abandon the euro? The risks of a euro referendum/outright euro-exit have fallen significantly since 9 12 months ago. Most anti-euro leaders have softened their tone on the subject. Luigi di Maio, M5S candidate for Prime Minister, has said that a referendum on leaving the euro would be a last resort, but that Italy s membership of the euro area could be used as a bargaining chip to force the EU to weaken its fiscal rules. Moreover, in a TV interview last week, he said that the moment was no longer appropriate for Italy to leave the euro area. A few days following the signature of a pre-election pact with anti-eu right wing parties Lega Nord and FdI, centre-right leader Berlusconi said in an interview that leaving the euro would be unsustainable for the Italian economy. Right-wing Lega Nord leader Matteo Salvini is the only one to still stick to his anti-euro rhetoric, but the alliance with Forza Italy might soften the Lega s idea of a radical exit from the euro. It is worth pointing out that, according to the European Commission s Eurobarometer survey, most Italians are still in favour of Italy s euro membership (see Chart 2). Their most pressing concerns are unemployment, terrorism and immigration, with pronounced disagreement among parties on how to deal with these three issues. Chart 2: Eurobarometer survey (support for Europe) Support for the European economic and monetary union with one single currency, the euro Nov 2017 May 2016 (Eurobarometer) Ireland Germany The Netherlands Spain Portugal France Austria Greece Italy Source: Pictet WM - AA&MR, European commission No major economic risk in the near term Following a double-dip recession in and a very shallow expansion in activity since 2014, the Italian economy has finally gained momentum since Q (see Chart 3). Domestic household demand has led the pick-up in growth, whereas corporate investment has improved only very recently. The cyclical recovery is expected to continue in the near term, and we forecast that Italian real GDP will expand by 1.5% in 2017 and 1.4% in A number of near-term vulnerabilities have also faded. In particular, bank non-performing loans are declining and Italy is running a current account surplus. Foreign holdings of government bonds have fallen. According to Bank of Italy data, public debt in the hands of foreign hands amounts to 32% of total debt (see Chart 4). This suggests that there would be contained macroeconomic consequences from an episode of higher interest rates. 18 January 2018 FLASH NOTE - Italy: politics PAGE 4

5 Chart 3: Italian and euro area real GDP growth % Q-o-q annualised Y-o-y Euro area (y-o-y) Source: Pictet WM - AA&MR, Istat, Eurostat Moreover, ECB accommodative monetary policy will also provide some backstop. In the event of a significant period of stress, it should not be forgotten that the programme is flexible enough to deal with day-to-day volatility. In particular, the ECB has been deviating from allocations of asset purchases based on capital keys. All in all, the current economic momentum and environment should carry Italy through the March election without major turbulence. Chart 4: Italian debt by holding sectors 60 % of total Bank of Italy Italian Banks Italian private sector Non-Resident Source: Pictet WM - AA&MR, Bank of Italy Medium-term challenges remain While near-term risks seem contained, medium-term risks are likely to be a key focus for investors. Compared with its euro area partners, Italy s potential growth is low, and youth unemployment (persons aged between years old) is at about 35%, among the highest in Europe. Over the past few years, Italy has endeavoured to address certain structural issues. For example, the Jobs Act and temporary social contribution exemptions (launched in 2015) have helped to improve the labour market and raised employment. Moreover, the government launched the National Industry 4.0 Plan, which provides a range of incentives to boost innovation 18 January 2018 FLASH NOTE - Italy: politics PAGE 5

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This document is issued by Banque Pictet & Cie SA. This publication and its content may be cited provided that the source is indicated. All rights reserved. Copyright Banque Pictet & Cie SA is established in Switzerland, exclusively licensed under Swiss Law and therefore subject to the supervision of the Swiss Financial Market Supervisory Authority (FINMA). Distributors: Banque Pictet & Cie SA, Pictet & Cie (Europe) SA and skills in new technologies over Measures to enhance the efficiency of civil justice and an education reform to improve school outcomes have also been put in place. There has been some progress in improving the health of the banking system as well. Nonetheless, more steps need to be taken to lift the Italian growth rate to a sustainably higher level. The Italian debt level is also a source of concern for many investors. The country has the second-highest debt load in the euro area, after Greece, at 132% of GDP (see Chart 5). Besides nominal GDP growth, primary balance and the level of debt, other variables are important to access debt sustainability risks: the maturity of the debt, its ownership and the size of private debt are crucial variables to analyse. The debt maturity has been close to seven years for a few years and, as mentioned previously and the share of public debt in the hands of foreign investors is low. But the risk is for Italian banks to be forced to hold less debt in the future. Therefore, the risk that a sudden negative event will have systemic consequences is limited, but debt sustainability remains a challenge for Italy in the medium term. Chart 5: Euro area public debt level by country % of GDP Germany France Italy Spain Greece Portugal Source: Pictet WM - AA&MR, European Commission January 2018 FLASH NOTE - Italy: politics PAGE 6