| Big regional test: At this Sunday’s regional elections in Italy, the vote to watch is in Emilia-Romagna (ER). In this traditional stronghold of the left, the centre-left and centre-right blocks are running neck-and-neck in the polls. c20% of voters are undecided. Losing “Red Emilia” would deal a severe blow to the left-of-centre coalition in Rome. |
| Scenario 1 – no change in the national government: If the centre-left retains ER, we think there is a 70% chance that the national coalition between the Democratic Party (PD)-led centre-left and the anti-establishment Five Stars would stay together at least until the next regional elections in May/June. The risk of losing national elections to right-wing Matteo Salvini is the glue that keeps the coalition together. Luigi di Maio’s resignation as leader of Five Stars may make the party even more eager to cling on to power in order to avoid a potentially disastrous defeat in snap elections. Even if the centre-left loses ER, we see at least a 40% probability that the coalition in Rome would soldier on. |
| Scenario 2 – the coalition falls apart: Conversely, the risk of the coalition collapsing in H1 2020 lies between 30% (if the centre-left holds ER) and 60% (if it loses ER). There was little love lost between the two coalition partners before they teamed up in September 2019. Since they have been in power, they have not developed positive feelings for each other. Neither has the coalition managed to win over voters. This year’s budget did not create fiscal space for any meaningful voter handouts. Instead, the coalition partners have struggled to find common ground on many policies. Five Stars is under pressure after losing c16ppt in the polls. Almost 30 lawmakers in parliament have left the party since March 2018. If the PD were to lose another regional bastion, after Umbria three months ago, it may conclude that it would have more to lose from staying in alliance with the ever-weaker Five Stars than from risking new elections. |
| Salvini’s rise to power may only be a matter of time: Regardless of the outcome of the election in ER and its consequences for the government in Rome, the coalition is so beset by problems that it seems unlikely to serve out a full term until spring 2023. Instead, Italy will probably face snap elections in 2020 or 2021 which the right-of-centre parties – currently polling at 50% – would likely win. That would enable Lega leader Salvini to become prime minister. |
| The real risk is the long-term: Beyond the short-term uncertainty of snap elections, Salvini as head of the government would probably not cause a major Italian crisis. A right-of-centre alliance would likely cut some taxes and increase infrastructure spending. Budget discussions with the EU would get noisier. But a prolonged escalation would be unlikely. Salvini has turned more conciliatory towards the EU. As a new prime minister, he would have a strong incentive not to risk a financial crisis or credit crunch. We would expect him to moderate his fiscal plans sufficiently to avoid such a fate. As usual, Brussels would probably tolerate a modest overshoot. However, whether Salvini would deliver the structural reforms Italy needs to improve its dismal productivity growth is a very open question. Without such reforms, Italy would remain a candidate for a debt crisis in the wake of a serious global downturn. |
Holger Schmieding
Chief Economist
+44 20 3207 7889
holger. schmieding@ berenberg. com
Kallum Pickering
Senior Economist
+44 20 3465 2672
kallum. pickering@ berenberg. com
Florian Hense
European Economist
+4420 3207 7859
florian. hense@ berenberg. com
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