Italy: Meloni prepares to head incoming centre-right government
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The centre-right coalition is poised to win the Sep 25 elections in a rather straightforward fashion, after managing to retain its political unity during the term of Mario Draghi's cabinet. Giorgia Meloni is the favourite to become Italy's first female PM, as her party Brothers of Italy (FdI) stands to receive more votes than its coalition partners - Matteo Salvini's Lega and Silvio Berlusconi's Forza Italia (FI).
Italy's mixed electoral system favours large coalitions, as 37% of the seats in both houses of Parliament are distributed through the first-past-the-post system. Seeing as cumulative support for the centre-right stands at about 46%, the failure of the centre-left field to form a wide alliance against Meloni, Salvini and Berlusconi should prove to be the decisive factor that ultimately hands the win to the centre-right.
Surprises seem unlikely, as any late shifts in political preferences are more likely to take place between parties of the same part of the political spectrum than to disturb the overall equilibrium. Even so, we believe that the so-called "Third pole" (the alliance between Carlo Calenda's Action and Matteo Renzi's Italia VIva) may exceed expectations at the polls by drawing votes from across the political spectrum. The Five Star Movement (M5S) is another key player that may overperform, as it has been trending higher in the polls in recent weeks.
MAIN SCENARIOS
Centre-right cabinet with an absolute majority (FdI, Lega, Forza Italia) - 75%
The comfortable lead of the centre-right coalition in the polls makes this by far the most likely outcome of the Sep 25 elections. Under the agreed terms in the coalition, Giorgia Meloni will head a cabinet that will enjoy majority support in both houses of Parliament. The main risk to the realization of this scenario lies in undecided voters or in failure to motivate centre-right supporters to cast their vote in what appears to be an already won election.
A centre-right government could at least temporarily increase the deficit through a series of tax cuts and the introduction of some form of a flat income tax. However, we do not believe that a Meloni-led cabinet will make major tax reform moves immediately after assuming power. The leader of FdI has also been rather sceptical of Lega's proposals to pursue a budget adjustment immediately after the elections, urging caution on what she sees as wasteful discretionary spending in the service of "speculators".
Failure to deliver on the coalition's ambitious goals to improve the business environment and spur investment could hurt the primary balance in the long term. Even then, the relationship between a Meloni-led government and the EU will be the main factor affecting risk spreads. The presence of Forza Italia in the government should alleviate some concerns and we do believe that Meloni will maintain her recently assumed moderate tone once she steps into office. That being said, the focus of international debt markets is certain to remain on Italy for some time to come.
Grand coalition (PD, Lega, Forza Italia, Action/Italia Viva) - 15%
This scenario is based on finding a feasible alternative parliamentary majority that excludes both FdI and the M5S - two parties which are projected to gain a combined 36-40% of the votes at the Sep 25 elections. Failure to elect Giorgia Meloni as the country's next PM due to some kind of disagreement within the centre-right coalition is the most likely trigger of the political processes that could result in such an outcome.
This scenario sees Berlusconi assume the role of king-maker, while also dragging Lega out of the centre-right coalition (breaking it apart in the process). This would be a repeat of the Draghi majority, with the main difference coming from Action and Italia Viva replacing the M5S. Such a grand coalition will most certainly not be an ideal solution in terms of its parliamentary stability, but taking the M5S out of the equation could help political predictability. Since Lega will be backing what will essentially be an anti-FdI cabinet, Salvini will most certainly not be in a hurry to return to the polls.
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Ideally, this scenario could result in the highly unlikely return of Mario Draghi, which is the clearly stated goal of Action and Italia Viva. The majority backing the cabinet will be much leaner than that behind the outgoing government but the formula could work, provided none of the aforementioned parties underperforms severely on Sep 25. While we believe that such a parliamentary majority could be mathematically possible right after the elections, it is more likely to surface later on during the life of the next Parliament, once a centre-right cabinet has first assumed power and then lost it for some reason.
New elections - 10%
A return to the polls remains a distant possibility due to the forecasted distribution of votes and the current geopolitical and economic environment. However, such a scenario could open the door to alternative majorities due to the ongoing shifts in voting preferences. New elections may accelerate processes that have already begun but have not yet fully unfolded. The recent resurgence of the M5S in the polls and the consolidation of the Action/Italia Viva alliance are two of the main factors that may come into play. Some of the smaller left-wing parties such as LeU and the Greens and Left Alliance (AVS) may be much more receptive to a potential alliance with the M5S, following the fiasco that was the electoral campaign of the PD-left centre-left coalition.
FdI is likely to concentrate even more of the centre-right vote, as repeat elections can only follow a failed attempt to come to terms with Lega and Forza Italia after what will most likely be a rather straightforward win on Sep 25. The visible decline of Forza Italia in the wake of the formation of the Action/Italia Viva coalition is another factor that may come into play. Faced with more political competition in the centre of the political spectrum, Berlusconi may feel the need to step out of the centre-right coalition in an effort to preserve the pro-EU orientation and image of his own party.
OPINION POLLS
Italian pollsters are not allowed to conduct surveys and publish data as of Sep 11 (two weeks before the election), which is why the latest available polling data has some limitations. However, the overall picture looks rather clear, as the centre-right looks almost certain to secure absolute majorities in both chambers of Parliament after the Sep 25 vote.
Giorgia Meloni's FdI has gone from strength to strength, despite choosing to lead a primarily passive and defensive campaign, looking to demonstrate moderation on a number of topics such as Italy's membership of the euro area. FdI will be the only party to challenge the 25% threshold, having syphoned sizeable support from the ranks of Matteo Salvini's Lega. However, the cumulative support for the centre-right coalition seems to have eased slightly heading into the final days of the campaign, as both Lega and Forza Italia have shown weakness in the polls. Despite Berlusconi's claims that FI will aim for double-digit support, it seems clear that the Action/Italia Viva alliance has managed to attract some of Berlusconi's supporters by offering them a moderate pro-EU alternative to the coalition with FdI and Lega. While Matteo Renzi and Carlo Calenda both have PD roots, their actions and their program have drawn enough of a line between them and their former party so as to avoid outright rejection from moderate centre-right voters. Last-minute scandals involving a FdI candidate's admiration of Adolf Hitler and speculations regarding Russia's contacts with leading centre-right politicians can hardly turn the tide in the vote, in our view.
The centre-left of the political spectrum remains in disarray, having wasted much of its campaign in efforts to scare Italian voters of the potential implications of a centre-right cabinet under Giorgia Meloni. International media and leading foreign politicians have shared their concerns but the prevailing mood among Italian voters seems to be largely unaffected. If anything, the PD's rather weak campaign has cleared the way for a rebound of the M5S and has created favourable conditions for a potential surprise on behalf of Action and Italia Viva. We have little doubt that any result below 20% will lead to intense pressure on the General Secretary of the PD Enrico Letta. The former champion of the wide field that was supposed to oppose the centre-right coalition broke ties with the M5S and failed to secure lasting cooperation with Action and Italia Viva, choosing to ally himself with smaller far-left parties instead. Simply put, in a matter of just two months, the PD managed to become everyone's enemy. We do not feel that Letta's gamble will end up paying off on Sep 25 and potentially further down the line. Indeed, the leader of the M5S Giuseppe Conte has already stated on a number of occasions that further cooperation between the two parties is impossible under the PD's current leadership.
LEGISLATIVE FRAMEWORK
Italy has a bicameral parliament with the lower house (the Chamber of Deputies) having 400 MPs and the upper house (the Senate) having 200 MPs, excluding the senators for life. The number of seats in both chambers was cut by about one-third as a result of the successful 2020 constitutional referendum promoted by the M5S. The referendum also lowered the minimum voting age for the Senate vote to 18 (from 25), equalling the voting base for both houses of Parliament. Both chambers have equal powers and a majority is needed in both of them to form a government. In both the lower and upper houses, 37% of seats are distributed through the first-past-the-post system in single-candidate districts with the largest coalition winning the seat. The remaining seats are distributed proportionally on a national basis.