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Italian Election 2018 – New Mess or More of the Same?

The following is from Steen Jakobsen via email.

The opinion polls stopped two weeks ago with consensus that a Five-Star movement led government is less than 10% likely by Monday.

This seems too low for me and certainly also for Deutsche Bank Asset Management (DBAM) who is their “An Italian Mudle” writes: “The Five-star movement may only be a normal policy error away from being able to block the formation of any realistic, broadly centrist, Pro-European government”.

DBAM rightly points out that even in a world of bad pollsters the Italians are worse than anyone else. DBAM estimates that the margin of error in Italian polls are 5% for the main parties and upward of 10% for the Five-Star movement. In other words by Monday morning Italy could once again be tested in its ability to create a new constructive political environment which would take Italy into 21st century.

This is the 18th legislative since 1948 – I guess the old Einstein quote: “keep repeating the same experiment expecting different result makes you an idiot” comes to mind!

The Italian economy is one of the few countries not to have reached its 2008 GDP level (it’s still 6% below). Youth unemployment remains stubbornly high (the Bank of Italy recently offered 30 junior positions and got 80.000 applications!), bad banks debt at 15% non-performing loans and a debt of more than 120% of GDP.

All the parties promises to spend more money while inflation in February reached a 14-month low. This is despite an almost embarrassing support from the ECB Chairman Draghi, who in my eyes is building all of ECB’s policies on extending help to Italy. Where Italy goes, ECB goes seems to be the motto – this modus operandi is running out of time as Bundesbank is about to take charge of ECB in 2019 – this is Italy’s final chance to get the house in order under low interest rates and infinite support from monetary policy. Unfortunately this final round of support will most like end up being used for another round of Silvio Berlusconi who single handed has kept Italy from reform over the last twenty years. I sometimes think Mr. B is Mr. Trump’s big hero!

There is four consensus outcomes for the election:

  1. The market friendly – Partito Democratico (Renzi) + Forza Italia (Berlusconi) (polls: 37%)
  2. Forza + Northern League + FDI (Fascist Party) (35%)
  3. Five-Star movement alliance (28%)
  4. Hung Parliament and a new election

The polls open @ 7 a.m and close @ 23.00 CET.

Exit polls will be available by 23.01. Result could be called around 2-3 A.M

My Call

I think the voter turnout will be extremely low. My Italian friends tells me the voting papers is extremely difficult to understand and hence staying home when nothing ever changes is very high!

A low turnout will generally work best for parties able to “activate” voters and here I share DBAM call that Five-Star Movement is likely to do better than the polls indicate and so is Northern Leauge, who under Matteo Salvini have become a real political movement with alliances internationally from Nigel Farage, Le Pen, and Donald Trump.

Two winners: Five Star + Northern League

If I am right, then things gets interesting as the Centre Right Alliance have decided that whichever party gets the most votes will get the Prime Minister office. My call is the new Italian PM will be Signor Salvini!

Market Reaction

Market will most likely get a centre right government alliance but with a Northern League PM – NOT – what the market is looking for. The Five Star Movement will be main opposition preparing to take over in the next 24 months!

Let’s hope the Italians can live up to their proverb: “A chi vuole, non mancano modi”

Steen Jakobsen | Chief Investment Officer

Mish Comments

Jakobsen's analysis is very similar to my call two days ago: Italy Election March 4: Consider a Surprise M5S + NL Alliance.

The lead-in image is from that post. Here were my comments:

Grand Coalition?

If the polls are accurate, the center-right and center-left could form a "grand" coalition. However, their policies are so divergent, it could not last.

Perhaps a "grand" coalitions forms as a matter of political expediency.

For example, Silvio Silvio Berlusconi could agree to the coalition with a thought of killing at at a convenient time next year when he can run again directly.

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The eurosceptic Northern League (NL) is very wary of the center-right alliance and Silvio Berlusconi's backstabbing history.

Berlusconi is now one of the more pro-europe proponents after having advocated leaving the euro.

However, the coalitions are set until after the election. The setup opens up quite a number of possibilities.

Other Possibilities

If no coalition or combination of coalitions can top 40%, the announced coalition agreements dissolve.

Should that happen, there is a distinct chance that M5S aligns with the Northern League.

M5S+LN easily tops 40%. Should M5S outperform, this is a likely result.

Italian polls are highly unreliable. If voters wish to voice disapproval, they will vote for M5S. It is on that basis I project M5S to surprise to the upside.

Following the election, whatever the outcome, there will be enormous pressure from every corner to form an unworkable "grand" coalition just as is happening now in Germany.

Final Polls Before the Vote

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I see things similarly but not identically with Jakobsen.

I too expressed the opinion that the Five Star Movement (M5S) and the Northern League (LN) would outperform.

However, the math to make Signor Salvini simply isn't there unless the center right gets 40% of the vote with the Northern League getting a higher total than FI.

At least that's what I thought.

Diving into Deutsche Bank's "Italian Muddle" I see this analysis.

Under the new electoral system, both chambers will be elected through a mix of proportional representation via party lists (for approximately 63% of seats) and first-past-the-post, single-member seats (the remaining roughly 37%). The rules still differ slightly. Notably, Italians need to be 25 years or older to vote for the Senate. But overall, the new system should ensure that both chambers will look very similar in terms of their party composition. This marks a big change. In the Italian system, the two houses perform identical functions. Previously, this and the at times very different party composition in the two houses contributed to gridlock

I still do not understand all of the nuances of the change, but the rules were change purposely to exclude M5S as I commented before.

Deutsche Bank suggests 37% might be enough for a majority.

Under the new electoral system, former prime minister Silvio Berlusconi's center-right coalition would most probably need a vote share of at least 36% to get close to winning a majority in both houses. How close is impossible to say at this point, numerous forecasting models notwithstanding. Under the new electoral system, small differences in the regional distribution of the vote share could have a big impact, particularly in shifting the balance of power for key marginal first-past-the-post constituencies in southern and central Italy.

Let's return to Jakobsen's statement for a second.

"If I am right, then things gets interesting as the Centre Right Alliance have decided that whichever party gets the most votes will get the Prime Minister office. My call is the new Italian PM will be Signor Salvini!"

See the problem? If the center right does not get an outright majority, then it is not up to the center right alone to decide the prime minister.

Both M5S and PD will easily outperform FI and LN. Both will want to make their leader the prime minister.

If 37% is all it takes for a "majority", then if the center-right gets 37%, then if the Northern League gets better vote totals than FI, then we have a Eurosceptic Italian prime minister.

Won't that be fun?

Should that math fail, then if the center right does not have an outright majority, then all of the outcomes I suggested come into play including an alliance between M5S and the Northern League or M5S and PD.

The natural coalition is the one I stated. M5S + LN. That would be fun too.

Mike "Mish" Shedlock