RaboResearch - Economic Research

Italy: to trigger or not to trigger elections

Economic Report

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  • Renzi has resigned as party leader, but he is bound to make a comeback in the spring
  • Early elections are in the cards, although we believe more likely in the fall than in June
  • That said, the chance of elections in 2018, according to schedule, is non-negligible
  • The efficiency of the next government is expected to remain hampered by fragmentation

Renzi resigned to regain control of ‘his’ party

Last weekend, PM Matteo Renzi resigned as party leader of the Partito Democratico (PD). He told PD members that the referendum defeat gave him no other option but to resign. Which makes sense. In effect this looks more like a well-planned move, as his resignation triggers the process of party primaries and ultimately elections in April/ May. Renzi himself has suggested 7 May would be a good date. This goes against the demands of left-wing dissidents, who wanted to hold the primaries in December, as planned. Primaries in Spring come too early for the left-wingers to put forward a credible contester to Renzi, who will re-run. With no credible opponent it is almost certain that Renzi will be the one who leads the PD through the next national elections. What are the implications of Renzi’s move for the timeline and outcome of national elections? 

Early elections most likely in the fall

Given the recent sequence of events, we believe that early elections are more likely than scheduled elections in 2018. Yet, I would say that the margin is not that large, with about a 60% change of early elections. If early elections are called they will most likely be held in the fall, as June is probably not feasible. The most important reason for early elections is that Renzi wants them, but triggering snap elections is in fact not that straightforward. And especially after the summer, Renzi will run into several hurdles.

2017 is going to be a tough year for the PD

There are clear incentives for Mr. Renzi to maintain a certain pace. Over the year 2017, Renzi is more likely to lose than to gain voters’ support due to the weak state of the economy (figure 1, see also Italy: all bets are off); a tight budget plan for 2018, to be presented in October; and the ongoing refugee crisis. Moreover, dissident left-leaning party members are quite likely to leave the PD in the coming days or weeks. We’re talking about possibly 20 Senators here. Given that the government currently only holds on to 162 of the 315 Senate seats, this would imply that the government no longer has an absolute majority in the Senate. The dissidents are unlikely to instantly withdraw government support, as they favour elections in 2018. Though they have significant incentives to make current PM Gentiloni’s life very difficult, as he is an ally of Renzi, who they think is too centrist and liberal. Meanwhile, Mr. Renzi probably figures that a ruling coalition acting as a lame duck is not a successful road to gaining voters’ support.

Figure 1: Economy remains in the doldrums
Figure 1: Economy remains in the doldrumsSource: Rabobank, Macrobond, Nigem

We believe that the electoral law is no longer likely to be a major delaying factor. The PD, and some other parties, still prefer to change it to their advantage, but with some recent tweaks imposed by the Constitutional Court it is in fact ready to be used. And Renzi is said to favour early elections over a long-lasting process with possibly only very minor further changes to the Italicum as a result.

So why the fall and not June?

While it’s not entirely impossible to hold elections in June, we should keep in mind that elections can at earliest be held 45 days after Parliament has been dissolved (at latest after 70 days). It is unlikely that the party wants resign from the government and trigger early elections before the party has installed its new leader in April/ May. Furthermore, there is a G7 meeting in Taormina at the end of May, leaving the government little time for campaining during the spring. 

Gentiloni could still finish his term

Still, despite Renzi’s preference for early elections, the chance of elections in 2018 is far from negligible. There are several reasons.

For example, elections soon after the summer recess would mean that parties have to campaign during the summer, which is quite unusual. Moreover, the fact that the government has to hand in its budget plan 2018 to the European Commission by mid-October and implement it in December, means that a government collapse and elections during the fall might be perceived as irresponsible. While of this might not butter Renzi that much, given his stated preference for early elections, other PD members seem less enthused. And this matters, because it is not only up to Renzi.

In fact, Renzi currently is not the PM, which means he cannot simply hand in the resignation of the government. Gentiloni could do that, but it’s far from certain that he is willing to do so after such a short period of time, not the least because the PD is divided about this issue. So, the path towards early elections is not as straightforward as it might look at first sight. Hence, if Renzi cannot get Gentiloni to agree with him that early elections are in the best interest of the party, Renzi has few options left. Renzi’s only option, once reinstalled as the party leader, might in fact be to put forward a bill of which he knows some PD members in parliament will reject it. This could then lead to those members withdrawing their support for the government, and thus a government collapse. It is not impossible, but it looks quite like a conspirancy theory. Moreover, in the end, it is not even up to the PM, but up to the President to call new elections. If President Mattarella fears that early elections could lead to financial and political instability, he is unlikely to be very willing to call early elections.

In any case, the closer we get to May 2018, the less sense it would make for the government to hand in its resignations or for Renzi to arrange the fall of a government run by his own party.

All in all, the arguments in favour of early elections outweigh those in favour of regular elections, yet the margin is not that large.

Elections, and then what?

Assuming early elections, what would be the ramifications for its outcome? Well, nothing to cheer about, we think. Given that major changes to the tweaked Italicum law are unlikely to be implemented before the elections take place, parliament will remain very much fragmented after the next elections. Both within each house of parliament and between both houses of parliament. The latter matters, as both houses have the same amount power (see for an explanation our piece The Voice of Italy).

On the bright side, this means that - going by the current polls - an absolute majority for the Five Star Movement (M5S) remains unlikely. The anti-establishment party would need to obtain at least 40% of the votes to acquire the majority premium that will give them 55% of the seats, and recent polls are at less than 30%. But the same holds for any other party. And with the imminent PD split, chances of an M5S election victory are increasing. In a worst case scenario for the country’s political stability, the M5S would win and be able to form a coalition with other Eurosceptic parties like Lega Nord and Fratelli d’Italia. While this is far from our base case scenario, since Beppe Grillo of M5S has ruled out coalitions and the ideological differences between the parties are large, we should not completely neglect the possibility. Together these parties are currently polling at around 45% of seats in the lower house. This could stoke fear that euro membership is at risk. Yet as explained in our piece The Voice of Italy, triggering an euro exit is not that easy for an Italian government.

In any case, it is far from certain that whoever wins the elections will be able to form a workable, let alone stable, majority. As such, government efficiency is likely to remain hampered by fragmentation, whilst political uncertainty is likely to remain high. Necessary reforms are unlikely to be completed and implemented and this raises the likelihood that economic growth will not get the boost necessary to grow itself out of its large public debt stock, which is currently over 130% of GDP.

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