Meet the New Boss…

After six rounds of voting, Italy has a president who can now work toward establishing a government.

Usually a figurehead, Italy’s president rarely garners much attention or has much ability to materially affect Italian politics. But recently, one of the president’s few functions has been in the spotlight: the ability to call parliamentary elections. In February, Italy’s parliamentary election left no party with a clear majority party in both houses. Polarized politicking ensued, preventing the biggest parties from forming a government through a grand coalition. Thus, the spotlight shifted to President Giorgio Napolitano. According to its election laws, when Italy faces a deadlocked Parliament, the President can appoint a technocratic leader as prime minister (subject to Parliamentary confirmation) or call new elections, but, per the Italian constitution, not within six months of his term’s end. Napolitano’s term expires in May, meaning Italy’s been deadlocked for almost two months with no potential government in sight.

That is, until Saturday. With Parliament hopelessly deadlocked over the existing presidential candidates, major party leaders convinced the 87-year old president to stand for a second seven-year term. Napolitano won by a landslide in April 20’s sixth ballot—bringing in 738 of 1007 votes and becoming the first president in the Republic’s 67-year history to win two terms. Though many expect Napolitano to resign before his next seven years are up, his re-election suggests Italy’s two major political parties (the center-left Democratic Party (PD) and center-right People of Freedom (PdL)) may be willing to cobble together a coalition government—further illustrating eurozone politicians’ will to solve economic issues continues.

As a politician, Napolitano’s had a colorful history and already an influential role in shaping Italy’s political history. A communist in his earlier life, he appointed technocrat Mario Monti as prime minister (PM) in 2011, after former PM Silvio Berlusconi resigned amid economic troubles. Since, Monti’s implemented some much-needed economic reforms, including beginning labor market reforms and opening the economy to greater competition—and some less desirable reforms like tax hikes—which made him very unpopular with the public.

And Napolitano again has the opportunity to help unwind gridlock in Italy’s Parliament. For the next few days, he’ll meet with politicians and party leaders to discuss the best way to establish a government, and many expect a plan within the week. But regardless how a government is created (holding new parliamentary elections, brokering a coalition, tapping a technocrat leader or some other method), Italy’s goals will remain the same: achieving economic growth, reforming labor markets, boosting competitiveness and reforming electoral law—cited as “one of the main reasons for the long deadlock.”

Yet, despite the strides of progress made, many worry Italy faces political turmoil and uncertainty. For instance, the Five-Star Movement’s leader, Beppe Grillo, resenting Napolitano’s re-election, urged supporters to protest the president’s swearing in. Additionally, the PD’s leader, Pier Luigi Bersani, stepped down after split factions within his party rallied behind various presidential candidates over his pick. Some fear left-most members of the PD will rally behind the radical left Five-Star Movement party, further fragmenting Parliament, but it’s also possible Bersani’s resignation helps facilitate coalition building.

Adding another dimension to Italian jitters, Berlusconi (center-right leader and man of non-stick Teflon) also plans to run for a fourth term as prime minister. Some see his campaign platform and claim Berlusconi’s anti-euro, but we think Silvio isn’t anti-anything. He’s merely pro-Silvio and his rhetoric is just a means to an end—winning votes—and he seemingly surmises he can better differentiate himself this way. Over the last few years, Berlusconi’s political stance on the common currency has flipped and flopped. We’d expect another turn if he regains the Prime Ministerial office.

While rumors of potential replacements for Bersani abound (Matteo Renzi, Napolitano’s favorite for Prime Minister, Guiliano Amato, or Bersani’s deputy, Enrico Letta, for a few), a clear frontrunner has yet to emerge. Choosing the PD’s new leader is effectively the next order of business. What follows is a likely attempt to forge Napolitano’s grand coalition.

As we’ve seen before, Italian politics can be very volatile. Just in November, Bersani was favored to replace Monti. But shortly after, Berlusconi’s popularity made a somewhat surprising comeback while a banking scandal stymied Bersani and the PD—showing political popularity in Italy can reverse, and quickly. So in our view, there’s no reason to suspect Italy won’t move forward from here or its political situation will worsen. Since the election, 10-year Italian bonds have dropped slightly, but not materially. Auctions of shorter-maturity debt saw record low yields Monday. Meaning the market doesn’t seem especially worried about Italy. European politics often move at the speed of sludge, so Italy’s uniquely bizarre version of elections isn’t surprising many.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.