Would it come as a surprise if Italy, which has seen 62 governments since the end of World War II won't have a government for a while after the upcoming elections, asks Fabrizio Quirighetti in an essay for finews.first.

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The Italian general elections will be held on March 4. They will elect the members of the Senate (315) and the Chamber of Deputies (620). Although the skies seem to have cleared somewhat with regard to the economic outlook, the results of the Italian elections are, unfortunately, very difficult to predict.

A victory for Luigi di Maio, the designated candidate for the Five Star party (M5S), which would undoubtedly be the worst-case scenario for the equity markets, Italian bonds, and the single currency (given his ambiguous position vis-à-vis the European Union) seems highly improbable.

This is particularly because his party does not want to form an alliance with the others, and they are not interested banding together with him either. Not only does he lack 7 percent to 10 percent of the national votes, but, moreover, the center-right is likely to grab the majority of the districts.

«A minority led by M5S has very little chance of seeing the light of day»

In that event, and even with a victory for the M5S party, a minority government led by M5S has very little chance of seeing the light of day because the current electoral system favors coalitions, which would lead the president of the republic to mandate a representative of the leading coalition (center-right) rather than the leading party.

That being the case, we can also dismiss the scenario of an anti-establishment government (M5S, FI and LN): even though it is possible in theory, given the scores achieved by each of these parties, in practice, there is a great deal of dissension between them and a reconciliation would lead to a loss of popular support because it would go against the very principles of M5S and its successful standpoint of «neither right, nor left».

According to the latest polls, this coalition is not far from obtaining a majority (it lacks between 20 and 50 seats). In the event that this shortfall drops to less than 20 seats, it could lead to the movement of some «centrist» parliamentarians from the left wing or desertion by other minor parties.

This «small» majority would certainly be welcomed by an increase in Italian equities, or at least by an outperformance vs. other European markets, as well as a reduction in the spread between Italian and German bonds and a slight increase in the euro in the short term, because such a small majority would lead to instability.

«Prime Minister Paolo Gentiloni is popular with investors»

The result would be an increase in uncertainty and tensions linked to the possibility of further elections in the next 6 to 12 months. However, beyond the positive impact of the news in the short term, there are unlikely to be any very significant or long-lasting effects because of a new uncertainty that would very quickly arise: the appointment of the new prime minister within this center-right coalition!

Silvio Berlusconi cannot take this on because he is ineligible as a result of legal proceedings in the past, but it is still he who calls the shots within his party; Matteo Salvini, and Lega Nord, have hinted at the desire to fulfil the role. The internal power struggle could be a lengthy and bitter one, potentially creating dissensions. As a result, this arrangement, which is not necessarily very stable, might not last very long.

Note that while Salvini's appointment at the head of the government would undoubtedly wipe out the positive reaction of the markets, an appointment from within the Forza Italia party would not guarantee an enthusiastic response from investors either. Particularly as the current prime minister, Paolo Gentiloni, who will continue at the helm during the transition period, is popular with investors.

A «narrow» defeat will not change much in terms of the scenario described above, apart from the following: the markets would not react so strongly in the short term and there would be less volatility in the medium term because the current prime minister will retain his mandate.

This is a possible outcome in the event that none of the parties or coalitions obtain a clear majority. We would most likely see a slight negative reaction from the markets in the first instance, but not a sense of panic, since on the one hand Gentiloni would remain at the helm and, ultimately, if the center-right and center-left parties join forces, that would certainly be the best possible scenario.

For the moment, the center-right coalition seems to be the most likely outcome, but the possibility of a large coalition could very quickly become a real probability if the scores obtained by the far-right parties turn out to be lower than expected.

«Italy needs to put structural reforms in place»

If it proves impossible to form a government in the coming months, there will be further elections held 6-12 months from now. The negative impact will be marginal but short-lived.

The draft budget will be affected. But ultimately, would it be such a great surprise if Italy, which has had 62 governments since the end of WW2, does not have a proper government in place for a few months? Maybe sometimes it's better to be ungoverned than badly governed.

More than any other major eurozone country, Italy needs to put structural reforms in place to try and dilute, as quickly as possible, its dangerous cocktail of low growth and booming public debt.

The Partito Democratico (PD) plans to maintain the status quo in terms of fiscal policy, and the impact of the Forza Italia plan is still difficult to evaluate (they promise significant tax reductions and an increase in pensions, although voluntary, or rather a desire to bring the primary surplus to +4 percent and reduce the public debt ratio to 110 percent in the next five years).

We can still dream, but the Italians do not believe that these measures will be implemented any time soon. Unless the winds of change one day blow over Italian politics, like they did in France.

Fabrizio Quirighetti is chief investment officer and co-head of Multi-Asset at SYZ Asset Management.

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