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Italy’s Election Results Are Bad News for All of Us

Electoral posters in Rome

Let me be blunt. The Italian election result is a triumph for fantasy and irresponsibility. It is quite bad news and no one knows what will happen next. It is possible to lay out several potential outcomes, with various degrees of damage to Italy, Europe, and the U.S. We can even handicap the odds of the outcomes, but we simply cannot know what will happen in this unprecedented situation.

The best outcome would have been a majority in the Chamber of Deputies for the Democratic Party and the partners in its electoral coalition and a majority in the Senate when their seats were combined with those of the party built around the out-going Prime Minister, Mario Monti. Both groupings have real flaws, but they are at least serious about proposing solutions for Italy that might actually work and are in line with the advice of their key European partners and, in most cases, with the advice of academics and neutral analysts.

Instead, Italians predominantly voted against pain and austerity, while ignoring the lack of reality, and sometimes outright irresponsibility, of the parties they supported.  It is hard to know whether to be more worried by the quarter of the vote that went to a new protest party formed by an Italian comic turned politician named Beppe Grillo, with its incoherent policies and lack of serious answers, or by the resurgence of Silvio Berlusconi. Berlusconi is at least a smart politician with a history as a leader, but he became a laughing stock in his disastrous last term as prime minister and he campaigned with promises of magic solutions that are clearly not realistic. He is held in contempt by many of the European leaders with whom the Italian government will have to work, which is crucial given the clear necessity of continued support from the stronger European nations.

The result of the election is that the Democratic party and its electoral coalition have a working majority in the Chamber of Deputies, but only because the current election law awards a bonus to guarantee 54% of the seats to the winner of the most votes, even if they receive less than a third of the actual votes, as was the case last night. The problem is that the law works differently for the Senate, which has co-equal powers with the Chamber. Here the result was a disaster. No one came close to a majority in the Senate. It would take a post-election coalition of two of the three major groupings to produce a majority and all of those potential coalitions are problematic. So what are the possibilities?

A grand coalition of the Democratic Party and Berlusconi. The likeliest result is probably that Berlusconi cuts a deal with the Democratic Party to form an unstable coalition government. (Monti’s group might be added, but its votes would not be needed and Berlusconi may not allow its inclusion.) It would be unstable despite holding a clear majority of seats in both houses, because the views and interests of Berlusconi and the Center-Left only partially overlap. Further, the Democratic Party is fairly committed to continuing on the economic path agreed with its European partners, while Berlusconi campaigned on the idea of rejecting that path. Finding a set of policies that both groups could support and that would not trigger a rupture with Germany and Brussels, spooking the markets, will be difficult. It will not be forgotten in Germany, which is facing its own election in the autumn, that Berlusconi demonized Merkel and Germany.

I nonetheless think this is the likeliest outcome because it could be less bad than the other choices and Berlusconi and the other politicians are pragmatists. For Berlusconi, it would be the opportunity to be back as part of the government, representing a triumphant resurgence for a man who was written off as dead politically. More importantly, it puts him in a position to protect his business and personal interests from the threat of further attack, including the ongoing criminal investigations. Berlusconi is very vulnerable when out of power, so being back has great attractions for him beyond all the usual reasons that politicians want power. It should be noted that he would not even have to take an office, but could operate behind the scenes through other members of his coalition.

For the Democratic party, it would let them stave off dangerous new elections and ensure that their leader, Bersani, would be prime minister. Their hope would be that surviving as a government for a year or so might allow enough time for tempers to cool among the protest voters and for the economic outlook to turn at least a little cheerier, improving their chances in any subsequent election. They might be able to obtain the agreement of Berlusconi to their key policy goals, as he has a very strong pragmatic streak.

New elections in a few months.  On the other hand, the gaps in views between Berlusconi and the Democratic party may prove too great to bridge. The chances of a different coalition being able to form a government are very low, so an inability to form a Berlusconi-Democratic party coalition would very likely force new elections in the near term. It is also possible that one side or the other believes that a new election would work to their advantage and therefore would force one. The President of the Republic, a largely non-political figure in the Italian system, would arrange an interim government to hold the country together for a few months until a new election takes place. There would be attempts to change the election law to improve the chances of a stable government the next time around. It is unclear whether it would be possible to gain a broad enough consensus to pull this off, however, so something close to the current system might stay in place.

Scenario A. If we are lucky, we might get a kind of repeat of the experience of last year’s Greek elections, where the second election produced a somewhat stable government of relatively responsible parties. The reactions of the markets and the rest of the world to Italy’s election may be sufficient to scare some sense back into the country. Enough of those who did not vote, or voted out of anger, may switch and vote for the Democratic party or for Monti’s group, giving a coalition of those two groupings a majority in both houses of parliament. This would likely still not produce a strong government, but it could be good enough to get by for a critical year or two. A couple of percentage point swing in the Senate votes could produce this relatively benign result.

Scenario B. The nightmare is that Grillo’s party could be bolstered by the failure of the traditional politicians to pull together a coalition. Enough Italians may be ready for a radical change, and a rejection of European pressure, that Grillo would get the nod the second time around. This seems to me to be a less likely result, as it requires a significant further swing to an untested party, combined with a fairly even breakdown of the vote between Berlusconi, the Democratic party, and Monti’s grouping that gives neither Berlusconi nor a Democratic party-Monti coalition enough votes. It is quite possible that Monti would withdraw and implicitly or explicitly throw his support behind the Democratic party coalition, as the lesser of the evils. This could ensure a plurality for that grouping, even if only half of his voters followed his lead.

However, it is easily conceivable that Grillo could win a plurality in the Chamber of Deputies and thereby 54% of the seats, even if he is far from a majority of seats in the Senate. This would produce an even more chaotic outcome than yesterday’s results, with the possibility of a third election to follow.

Scenario C. It is also conceivable that Berlusconi would ride back to power in a new election, although this is the least likely of the outcomes. He could combine the political advantages of his attacks on European-imposed austerity with an image as the one politician strong enough to pull together a working government. However, he is not likely to pick up many Grillo voters, who seem quite disgusted with the existing politicians, nor many of those who voted for the Democratic party. He might pick up some Monti voters who are not comfortable voting for the Center-Left, however, and he might pick up some of the abstainers. Berlusconi came close to winning a plurality of votes for the Chamber, so it is certainly possible that Italy’s greatest living campaigner might pull off an even bigger victory next time.

A coalition with Grillo. A coalition of Grillo with the Democratic party grouping would have a majority of seats in the Chamber and the Senate. This might appear plausible, since Grillo seems to have gained most of his support from the left of the political spectrum. However, Grillo’s support is for a rejection of the traditional politicians, including the Democratic party, and for a rejection of the accomodations being made to the rest of Europe, and even for a potential withdrawal from the Euro.

Further, Grillo has come close enough to victory to taste it and is more likely to prefer to gamble on another round of elections rather than risk losing much of his support by being part of a government that will inevitably disappoint many of his followers. Protest parties often lose much of their base if they join in an actual government and thereby take on responsibility for real world decisions.

The prospects for a Berlusconi-Grillo government do not appear much better. Grillo’s voters are not natural allies of Berlusconi. For his part, Berlusconi would find it very hard to fit Grillo’s party into a government that he led. He would either have to follow through on rhetoric that would immediately pit him against the rest of Europe and against the markets, likely bringing his government down in short order, or would face a risk of losing Grillo’s support in the near-term.

Conclusions

In the end, we know we are facing a period of serious uncertainty for Italy, for Europe, and in consequence, for the U.S. Europe will very likely hold together, but an increased probability of a truly bad outcome could depress economic activity across the world, as businesses and families hold off on investments in the future and on spending while they wait for the uncertainty to be worked through.

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