Italy under instability! | What comes next? (2)
No majority in the next parliament. It should be a fact by now that the next Italian parliament will have no strong single presence; it is a split. On one hand we had the center-left coalition led by Pier Luigi Bersani (in the lower house), but on the other hand we have a Berlusconi & Bersani senate with no majority. The question now is, what comes next?
The hung parliament is not a favorable scenario for markets, as it is simply expressed in Quartz: "The outcome is bad news for hopes that the country would stick to the fiscal austerity reforms enacted by outgoing prime minister Mario Monti to escape the country’s recession and help lift the euro zone. Polls had previously predicted a win for Bersani, who has said he would continue Monti’s reforms and possibly form a coalition with the technocrat to keep markets happy."
The most favorable outcome to investors and analysts, according to polls, would have been a center-left victory in order to continue the economic reform policies initiated by Monti. However, with a hung parliament, it looks that Bersani will have a rough time when trying to continue the austerity reforms.
The alliance between Monti and Bersani help to get majority in the lower house but was not strong enough to obtain leadership in the Senate. This was somehow expected already four days before, as Beppe Grillo's party Five Star started to win an incredibly surprising amount of support, taking away votes from the center-left coalition. Still, I believe many investors were keeping fingers crossed to see a last-minute change in the panorama with Beppe Grillo's party out and more votes for the center-left coalition. This did not materialize. Expect adverse reactions in the market.
To make matters worse, a hung parliament is a pretty new issue for a country like Italy. Italians have not see such a phenomena in the whole history of the republic. Politicians do not have the know how, negotation will or the motivation to form alliances that could help to digest the very needed reforms. What happens next?
Below 3 possible scenarios for the newar future.
1) Elections once more? It is not impossible. It happened in Greece, that endured two rounds of parliamentary elections due unexpected support to radical party SYRIZA. Since Bersani is not good at PR, Berlusconi makes impossible promises and Grillo is just Grillo, the next elections' result could be totally unpredictable. The uncertainty will cause a bearish wave in Italy and EZ.
2) Euro falls more: Very likely. Actually already happening! Look what happened to the yield of 10-year Italian bonds right after the news that Berlusconi would lead the senate appeared on the terminals.
The effect of the political uncertain future of Italy on the future of the monetary union could be greater than expected. Failing to negotiate reforms and political uncertainty could cause fast sales of Italian bonds and a weak Euro in the next weeks.
3) Hung parliament remains: Then you have a big issue. We know that the Bersani-Monti coalition will give priority to fiscal balance order, tax evation fighting and pro-euro reforms, giving stability to both the country and the Eurozone. They both advocate reforms targeting market liberalization and boasting industrial competitiviness. What we do not know is how the will be able to actually implement these reforms under a hung parliament. Maybe they will find a way but the time and uncertainty are already strong negative catalysts that although not strong enough to change the overall macrodynamics of the Eurozone, make us pessimistic on the future prospects of the Euro.