Fisher Investments Editorial Staff
Politics

Italy’s Greecey Elections

By, 02/27/2013

Italy went to the polls Sunday, and after much speculation over unofficial exit polls the results are in: The center-left coalition led by Pier Luigi Bersani won a majority in the lower house, but the upper house was a draw. Scandal-plagued former Prime Minister Silvio Berlusconi’s center-right coalition took 116 seats, Bersani took 113,  comedian Beppe Grillo’s anti-establishment Five Star Movement captured 54 and outgoing Prime Minister Mario Monti’s centrist coalition won 18. And so the world wondered: With no party winning a majority in both houses, can Italy move forward?

Recent history suggests it can. As we learned with Greece’s 2012 elections, deadlock doesn’t guarantee disaster. Recall, last May, Greeks split the vote between pro-austerity New Democracy and PASOK, the sort-of-ok-with-austerity Democratic Left and the anti-austerity Syriza, and no one could form a coalition. As a result, new elections were scheduled for June, and for six weeks folks feared Greece wouldn’t get a workable government—or, worse, anti-austerity parties would win a combined majority. But reality exceeded fears: In round two, Greeks handed a combined majority to the three parties supporting continuing eurozone membership and economic reform. And though Greece still has a long way to go, we’d argue the country is considerably better off than it was before the election. (Though how much the Greek government helped versus its European peers is debatable.)

Like Greece in 2012, voter backlash against austerity is now rising in Italy, leading many to believe Grillo’s movement might capture even more seats if another election is called—likely one big reason Bersani, Monti and even Berlusconi are keen to avoid a snap re-vote. But even if parliament remains split a while, reform isn’t necessarily doomed. Maybe Berlusconi, Monti and Bersani form a “grand coalition” in the upper house to limit Five Star’s influence and agree on some basic measures—an optimistic outcome, but a possibility. And not without precedent—Monti presided over a similar unity government, and despite Berlusconi’s populist claims, he and several members of his party have some common ground with Bersani. Or, maybe, the three create a temporary unity government to revise election laws—making it easier to form a stable government even if no party wins a clear majority—and then hold a new contest in several months’ or a year’s time. By then, Grillo could very well have lost his populist thunder, paving the way for results similar to Greece’s second election.  

If Greece’s political uncertainty didn’t cause a eurozone meltdown, it’s hard to see why Italy’s will be much different. For one, Italy’s not Greece—it may have a high debt load thanks to decades of overspending, but these days it runs a primary surplus. Italy’s also more stable economically than Greece was during its elections, and it’s largely and consistently able to afford its outstanding debt and pay back bondholders. Plus, Italy passed several beneficial reforms under Monti—namely, measures to clamp down on tax avoidance and free labor markets—along with austerity measures. Greece, on the other hand, still very much struggles with debt and has yet to see much reform take shape. Plus, Italy’s not exactly a stranger to political uncertainty.

Which may reign for a few weeks or more in Italy, but economically, disaster isn’t likely around the corner. Even if, as some fear, Berlusconi and Grillo form a coalition to block movements from Bersani’s party in the upper house (unlikely, considering Berlusconi and Grillo’s massive ideological differences). Yes, the resulting gridlock may prevent new reforms, but it won’t undo the previous, beneficial reforms—repeal takes a full majority, just like passing new legislation. This means Monti’s structural reforms should stay and get a chance to work as intended, at least for the foreseeable future—a positive, considering their impact takes time to flow through to the broader economy. Politically unpopular spending cuts likely stay, too, helping get the debt load in check. Yes, Italy could use further reforms from here, but hitting “pause” for a while isn’t the worst thing that could happen.

What matters most is, despite the unpopularity of austerity (in both Italy and Greece), European politicians have shown great dedication to solving eurozone woes, and citizens ultimately have shown their preference for maintaining the euro. These mentalities may not be evident in Italy today, but over time, both likely prevail.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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