Italian Political Crisis Deepens – Snap Elections Beckon

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The Italian political crisis deepens once again this week following the failure of the third round of negotiations in the ongoing Italian elections. Given the continued stalemate within these negotiations it is increasingly likely that further elections will be called. Given the public’s disappointment with both the traditional political parties and the political system a whole, further elections are likely to see an increased show of support from the Five Star Movement with the potential for a coalition with the centre right League party.

Mattarella Pushes For Temporary Government

This week’s negotiations were the third, and potentially final, round of negotiations following the election on March 4th, which failed to identify a clear majority for any party. Following the collapse of the talks, President Mattarella addressed the nation to announce his decision to appoint a temporary government which would be responsible for approving the budget in lieu of returning to the polls next year (most likely in H1) to hold further elections.

Mattarella said that Italy is in need of a government with full capacity, capable of managing such a task while the political parties continue to meat out a deal or head back to the polls. The President was keen to stress that such a government would remain in office only until December, at the latest, at which point it would then step down. He also added that should an alternative political majority emerge during that time, the temporary government would step down sooner.

However, a temporary government might struggle to gain the parliamentary support needed to win votes in both chambers and so its effectiveness would be limited. Following the President’s speech, both the Five Star Movement and League said that they would be in favour of snap elections over the forming of such a government with both Matteo Salvini of League and Luigi Di Maio of the Five Star Movement highlighting July 8th a potential date for such elections.

Given the current stalemate, unless either the Five Star Movement or League alter their stance it seems unlikely that such a government will be formed. With the two parties combined controlling 47 seats in the Lower House and 167 seats in the Senate, it would be impossible to form a temporary government without their support.

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Snap Elections in Focus

The Italian constitution dictates that elections for a new parliament must occur with 70 days from the end of the term of the previous House. If Mattarella dissolves parliament within a week, the earliest snap elections could be held is the 22nd of July. However, as holding elections in July and August is likely to have a negative impact on voter turnout, the later part of September looks the most likely option. However, it is important to note that July elections should not be ruled out as holding the elections in September would give the new government less time to deliver new fiscal measures needed to avoid triggering fiscal safety clauses which would likely have a negative affect on growth.

Risks

In terms of risks as the Italian political crisis deepens, there are two main economic threats. The first is that prolonged political uncertainty could negatively impact Italian business confidence, causing a delay in investment decisions. Secondly, if there isn’t enough time for the next government to deliver fiscal measures ahead of the triggering of 2019 fiscal safety clauses this would see VAT hikes of 2.2% to 24.2% on the standard rate and a 1.5% rise in the immediate rate to 11.5%. This would have a negative impact on the domestic economic outlook as it would damage private consumption which has been the backbone of the frail economic recovery to date.

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