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SEB report: Italian elections likely to secure continuation of reforms

SEB report: Italian elections likely to secure continuation of reforms

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Published by SEB Group

The Italian general election to be held on 24-25 February is expected to result in a compromise alliance between the Centre-left and the Mario Monti-led coalition. This is likely to be sufficient to ensure the continuation of reforms and austerity measures.

The Italian general election to be held on 24-25 February is expected to result in a compromise alliance between the Centre-left and the Mario Monti-led coalition. This is likely to be sufficient to ensure the continuation of reforms and austerity measures.

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Published by: SEB Group on Feb 20, 2013
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09/17/2013

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This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document
1
 are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted forany direct or consequential loss resulting from reliance on this document Changes may be made to opinions or information contained herein without notice.Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in theUS. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct ofinvestment business in the UK.
Italian general election: continued post-electionreforms and austerity measures?
WEDNESDAY
20 FEBRUARY, 2013
The Italian general election to be held on 24-25February is expected to result in a compromisealliance between the Centre-left and the MarioMonti-led coalition. This is likely to be sufficient toensure the continuation of reforms and austerity measures.However, the peculiarities of the Italian electoral system, a sharp increase in support for theBerlusconi-led Centre-right coalition and theunusually large number of undecided voters makethe final result unpredictable. Consequently, afurther election and continuing uncertainty cannot be ruled out.
BACKGROUND.
Mario
Monti
became Prime Minister inNovember 2011 after his predecessor, Silvio
Berlusconi,
was
 
forced to resign amidst a deepening economic crisisand the prospect of facing criminal charges.Subsequently,
Monti’s technocratic governmentintroduced various austerity measures andstructural reforms
(labour market, pension system) toimprove Italian competitiveness. Political stabilityincreased and policies were rewarded by a substantialfall in government bond yields.However, at the beginning of December last year,Berlusconi’s
People of Freedom
party withdrew itssupport for the
Monti
government, triggering an earlyelection. The Prime Minster
resigned
and a generalelection was scheduled for 24-25 February. On 28December 2012, Monti announced his candidacy asleader of a three-party coalition, his aim being to
defendhis reform agenda
, enabling the continuation ofstructural reforms and austerity measures.
THE ELECTORAL SYSTEM IMPLIES A SUBSTANTIALRISK OF A HUNG PARLIAMENT.
Next weekend’s pollinvolves the election of representatives to the
Chamberof Deputies
(lower house, 630 members) and
Senate
 (upper house, 315 elected members). The Italian
electoral system is complex
, most importantlybecause the so-called majority premiums in the upperand lower houses are determined differently.Consequently, a majority in the lower house in no wayguarantees a similar situation in the upper, where thepremium is calculated on a regional rather than nationalbasis. The difference creates a
substantial risk of ahung parliament
, making the election result difficult topredict since the outcome may be decided in a handfulof key regions.
FOUR MAIN CONTENDERS.
Only four main electioncontenders possess sufficient popular support to make adifference; three coalitions (Centre-left, Centre-right andMonti-led) and a single party (the Five Star Movement).The tendency for individual parties to co-operatethrough coalitions renders them both ideologically andeconomically diverse.The
Centre-left
four-party coalition is dominated byPierluigi Bersani’s Democratic Party (PD), which supportsMonti’s reforms while also including several left-wingparties highly critical of his initiatives, especially hislabour market reforms. The
Monti-led
 
coalition
is themost coherent. The three parties seem to agree on itsleader’s programme targeting Italy’s weak productivityand growth. Berlusconi’s
Centre-right
coalition is analliance between the People of Freedom (Berlusconi),Northern League and other smaller parties, comprisingan ideological mix of conservatism, liberalism andregionalism. Its campaigning has focused on anti-austerity rhetoric. Berlusconi has a poor leadershiprecord in devising and implementing effective reforms.The
Five Star Movement
pursues clearly anti-establishment policies, which include euro scepticismand reform of the political system in favour of greaterdirect democracy. The party has no policies to solveItaly’s weak government finances and lack of economicgrowth.
MOST RECENT POLLS SHOW INCREASEDUNCERTAINTY.
As Italian law prohibits the latepublication of opinion polls, the last was released on 8February. The following table shows results by coalition
 
 2
 
Economic Insights
or single political party, based on nine surveys publishedon 7-8 February.
Coalition / party Average Median
Centre-left 34.7% 34.4%Centre-right 28.9% 28.6%Five Star Movement 15.8% 15.9%Monti-led coalition 14.0% 14.1%Other 6.5% 6.4%The
Centre-left coalition was most popular
with overone third of votes, followed by the Centre-right coalition.Although until recently, the former enjoyed a clear leadover the latter, the gap has narrowed from nearly 15percentage points in December to only around 6percentage points in the last polls published. In ouropinion, while Monti is a strong administrator he is amuch less skilful campaigner, having struggled to buildpopular support among voters, competing with the FiveStar Movement for third place in the polls.
FINANCIAL MARKETS HURT BY LATE SURGE INSUPPORT FOR BERLUSCONI-LED CENTRE-RIGHTCOALITION.
Italian government bond yields haveincreased and the stock market fallen on signs of gainsby the Berlusconi-led coalition. With no further pollspublishable before the election, uncertainty is expectedto remain elevated. In addition, unusually large numbersof undecided voters make the final result unpredictable.
MOST LIKELY RESULT A COMPROMISE BETWEEN THECENTRE-LEFT AND MONTI-LED COALITONS.
Predicting the result of the election is difficult withseveral possible outcomes. The recent jump in supportfor the Centre-right coalition has further increased therisk of a hung parliament, threatening
another electionand continuing uncertainty
. In our opinion, this wouldbe the worst case scenario. However, we believe
themost likely post-election result is a compromisealliance between the Centre-left and Monti-ledcoalitions
, a situation potentially supporting
continuedreforms and austerity measures
, possibly with Montiin charge of the economy. However, the key issue indetermining the likelihood of such an outcome iswhether the Centre-left Democratic Party will leantowards the Monti-coalition, supporting reforms andausterity or towards the Centre-left SEL party, avociferous critic of Monti's reforms, especially thoseaffecting the labour market.
The second most likely result is a pure Centre-leftcoalition government.
As far as reforms are concerned,this would be a less satisfactory situation as such agovernment would not depend on the support of Monti’smore reform-minded coalition. In this scenario, drivingthrough much-needed changes would become muchmore difficult.
ECONOMIC OUTLOOK.
Italy faces two main economicproblems:
weak competitiveness
and
poor growth
.Italian GDP increases have consistently underperformedthe rest of the Euro zone, with the former posting anaverage annual rise of 0.8% and the latter 1.5% between1992 and 2012.
Several reforms
were implemented by the previousMonti government, the most important of which affectedthe
labour market
and
pension system
. However,continued initiatives are necessary to reverse Italy’s poorgrowth record.Regarding recent economic developments,
GDP hasfallen for six consecutive quarters
. In Q4 2012, GDPgrowth declined by a worse-than-expected 0.9%.Currently, economic expansion is adversely affected byweak government finances, with the budget deficit near3% and public debt above 120% of GDP. To meet itsbudget deficit target,
the government mustimplement
 
further
 
austerity measures
, probablytotalling
 
around EUR 9bn.

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