On Sunday 4th March Italian voters will head to the polls to elect all 630 members of the Chamber of Deputies (lower house) and 315 members of the Senate (upper house).
Voting will take place between the hours of 0600-2200GMT with exit polls to be published shortly after.
It is expected that Parliamentary Composition Projections will be published at around 2300-2330GMT.
What happens after the election results are released?
As summarised by Barclays:
23rd March: Parliament will gather for the first time
23rd – 30th March: Both the upper and lower houses will elect their respective Presidents and then begin consultations with President Mattarella
30th March – 6th April: President Mattarella will name his chosen candidate to form a government. Note, Mattarella will choose the candidate which he deems to have the best chance of forming a government, not necessarily the candidate whose party gained the largest share of the vote.
**In the week that follows this, the candidate will either accept the mandate and both houses will hold a vote on the appointment. Alternatively, if no deal can be agreed, Italy will then move on to a fresh round of consultations.**
As of October 26th 2017, the Italian electoral system involves a combination of proportional and majoritarian voting. More specifically, Italian voters will cast one vote for each of the houses of Parliament with the Chamber of Deputies split into 28 districts and the Senate into 20.61% of the seats will be subject to proportional representation, 37% first-past-the-post and 2% for overseas Italians.
Further to this, parties require at least 3% of the national vote to gain Parliamentary seats. In the Chamber of Deputies, coalitions require 10% and the Senate requires 20%.
Essentially, the proportional nature of the system is an attempt to make it more difficult for populist parties to gain power and instead favour broader conventional coalitions.
Parties and Potential Coalition Options
Democratic Party (PD) – Leader: Matteo Renzi. Stance: Social Democracy
More Europe (+E) – Leader: Emma Bonino. Stance: Liberalism
Together (I) – Leader: Giulio Santagata. Stance:Progressivism
Popular Civic List (CP) – Leader: Beatrice Lorenzin. Stance: Centrist
SVP-PATT – Leader: Philipp Achammer. Stance: Regionalism
Aosta Vallley (VdA) – Leader: Alessia Favre. Stance: Regionalism
Forza Italia (FI) – Leader: Silvio Berlusconi. Stance: Liberal Conservative
League (L) – Leader: Matteo Salvini. Stance: Populism/anti-Euro
Brothers of Italy (Fdl) – Leader: Giorgia Meloni. Stance: National Conservatism
Us with Italy (Ncl) – Leader: Raffaele Fitto. Stance: Christian Democracy
Five Star Movement (M5S) – Leader: Luigi Di Maio. Stance: Populist/anti-Euro
Unlike most other national elections across the continent, Italy operates with a blackout period with polling ceasing as of February 16th. Please see below for the FT’s final polling:
As a bit of context to the above, historical precedent stipulates that the centre-right coalition would require approximately 40% of the popular vote to govern; no individual poll has shown that this will happen. That said, when margin of errors and undecideds (approx. 20%) are factored in, it is plausible that the 40% threshold could be crossed with the centre-right movement currently projected to gain 37% of the seats. For the Five Star Movement, although they are set to become the single largest party, they typically have an (albeit softening) anti-coalition stance as it would dent their populist credentials. Additionally, the ‘Free and Equal’ coalition is a break-away coalition from the original centre-left coalition and thus has hampered prospects for a Renzi-led government.
**Note, the new voting system could lead to a higher margin of error for polls due to lack of a historical precedent**
The next section will discuss the plausibility of these coalitions actually being formed in what is a particularly fragmented system.
Most likely outcomes:
Plausibility: Despite being seen as the most likely option, this outcome would still come with its complications depending on the potential balance of power between the Forza Italia (FI) and the League (L), whereby it is unlikely that FI would be willing to be a junior partner to L (plausible outcome given margin of errors in polling). Furthermore, neither party attended a scheduled rally aiming at promoting unity in the centre-right movement and thus would require a building of bridges.
Policies: Any policy direction from the coalition will ultimately depend on the balance of power between FI and L with L far more radical/Euro-cynical than the pro-business/pro-Euro FI party. However, ultimately, L would have to pull-back in some of their anti-EU rhetoric and respect EU budgetary rules. Overall, both parties would likely hamper Italy’s fiscal position given expenditure plans which would include increased pension contributions and a ‘dignity income’ alongside lower taxation.
Market reaction: ABN Amro highlight that any coalition that offers a prominent role to L could be damaging for Italian assets if they ramp up anti-EU rhetoric or pose a threat to Italy’s fiscal position. ING add that this outcome could lead to market-volatility in the short-term with this either pro-longed or stopped depending on how EU-friendly the subsequently elected PM is. However, HSBC suggest that the negative market reaction to recent press reports of possible splits in the centre-right coalition suggests the initial market reaction to a possible centre-right majority might be positive given the historically pro-business views of a potential tie-up; albeit this assumption could be viewed as superficial and ultimately see the 10yr SP-IT spread widen to circa 60bp in the long-term as some proposed measures would likely be hard to deliver on.
Plausibility: This option has been touted by some as the most plausible outcome given the aforementioned difficulties in forming a centre-right government, with the chance of this happening said to be more likely, the better the performance of the centre-left coalition. This option would likely need to be under-pinned by some of the other smaller centrist parties but ultimately shouldn’t pose too much of a threat to the group’s prospects, IF they are able to gain the seats to do so. However, the largest obstacle will be Renzi (PD) and Berlusconi (FI) agreeing to form such a government; something which they have historically stated they would wish to avoid in favour of fresh elections. That said, parallels could be drawn between the PD/FI relationship and that of the CDU/SPD in Germany with the SPD initially reluctant to pursue a coalition with their German counterpart.
Policies: Both parties hold a broadly pro-EU stance and would likely be able to find common ground on business and labour policies despite differing views on immigration. Ultimately, Rabobank concludes that such a tie-up would be unlikely to provide much in the way of blockbuster reforms but there would be limited fears over reform rollbacks.
Market reaction: This outcome has been highlighted by ANB Amro as the “best-case scenario for markets”; a view backed by UBS. ABN Amro expand on this by stating that “Fiscal policy will be expansionary, but both parties do respect the 3% deficit limit. Moreover, both parties have a pro-Europe stance, the PD in particular”. HSBC add that although this would likely be seen as a market-positive, such a move could take some time to bear fruition after election day until a government is formally sworn in given the difficulties in the process.
Populist Government (L, MS5 and Fdl):
Plausibility: Deemed as highly unlikely even if the parties are able to scrape together enough seats between them. Such a coalition would depend on the willingness of the Five Star Movement which at this stage appears to be unlikely (despite a recent softening of their opposition to coalitions) given their anti-establishment views. Furthermore, as stated above, President Mattarella would be under no obligation to ask such a coalition to form a government and as such would be unlikely to.
Policies: Despite being of the populist mould, the coalition would hold fairly wide-ranging views but ultimately would most likely lead to a ramp-up in public spending, lower taxes and anti-austerity measures. The collection of parties would overall hold an anti-Euro bias but note that the Five Star Movement have recently gone back on their pledge to hold an EUR referendum.
Market reaction: Naturally, given the populist policies and subsequent fiscal slippage from such a deal, many commentators have highlighted this outcome as the least preferable one to markets. HSBC explain that financials would likely be hit hard by such a result and would subsequently hamper the broader Italian market as financial names account for around a third of the market cap for Italian equities. In terms of the EUR, despite some of the anti-EUR sentiment, such radical policies would struggle to make their way through the Italian Parliament and as such, a populist government would be unlikely to provide much weight on the shared-currency.
Other possible outcomes
Outright victory of a single block:
The only party with even the vaguest chance of an outright victory would be Five Star Movement who are currently polling at around 28% of the vote. However, it would take a huge margin of error by pollsters for this to become a reality and as such, UBS have assigned this outcome with a ‘low probability’ rating. The potential market reaction to such a result would be similar to that of a populist government as discussed above.
Should all of the above options fail, Italian voters would be sent back to the voting booths in an attempt to break the deadlock. During this period, the current Gentiloni government would operate on a caretaker basis but the ongoing political uncertainty would likely act as a negative to Italian assets.
UBS stocks to watch
Favoured stocks in the event of a market friendly outcome (based on strong balance sheets, international focus and beneficiaries of higher rates): Eni, Enel, Intesa Sanpaolo, Banco BPM, Inwit and Luxottica
Stocks to avoid ahead of the election (based on domestic focus and high debt burdens): Telecom Italia, Terna, Snam
**Note, that the impact of the Italian election is likely to be confined to Italian assets given the unlikelihood for the election to result in Italy’s withdrawal from the shared-currency. Furthermore, the election also takes place on the same day as the German SPD vote. In the event that the CDU/CSU and SPD coalition fails to receive the backing of SPD members then this would likely act as more of a driving force for the EUR than events in Italy**