Berlusconi cliff?

Back in July last year I wrote a post on Italy’s political risk explaining that even under the steerage of Mario Monti the Italian economy was still displaying the same long-term downward trend that it has for the last four decades and this would likely present a risk for Europe as the Italian election neared in 2013. What I said in that post was that any economic reform would take time and would require political stability:

… however, although the economic story is a sorry tale, it may not be Italy’s largest short-term risk. As noted by Moody’s, Italy has the ability to use its large private sector wealth as a buffer and with a focussed and well managed transition towards greater production the country could potentially works its way out of its troubles while staying within the monetary union. That being the case, one of the most important assets Italy will require is a strong and stable leadership.

And given Italy’s circumstances this had the potential to create an economic and political head-ache for the rest of Europe because Mario Monti was a temporary technocrat and economic weakness from  structural adjustment was always going to given Italy’s politicians an easy target. As I said then:

… given these reports it would appear that Italy is moving towards a period of political instability. This is certainly not an environment in which you would expect to see substantial progress on the structural reforms or maintenance of fiscal austerity. We are yet to see exactly what the Italian political landscape becomes if Mr Monti does take to the exits, but it is quite possible that Italy’s politics once again become far more of a concern to the financial world than the nation’s economy.

Since I wrote that post 5 months ago Italy’s economic metrics have worsened with industrial production and employment falling further and the forecast for 2013 continuing to deteriorate.

Over the last week it became obvious that Mario Monti was reaching the end of his tenure and Berlusconi’s party held back support. After talks with Italian President, Giorgio Napolitano, over the weekend Mr Monti pre-announced that he would depart his position as soon as the budget for 2013-15 had passed through parliament. Given the overnight falls in Italian markets this appears to have caught many by surprise but I’m unsure why. Mario Monti was always going to have to relinquish his technocratic position and this announcement only brings forward that departure by a few weeks. Perhaps the concern is more about the possible re-rise of Berlusconi, but as I said in my July piece this was always a possibility as continued economic weakens was guaranteed to provide an opportunistic cantilever to not just to Berlusconi but any other anti-euro/anti-austerity politician.

The budget law is due to be put before the parliament in the next 2 weeks and , if approved, we could see Mario Monti resign in the last week of December. Italian parliament would then be dissolved and the campaign would begin in earnest with a election date some time in late February.

I don’t think it is too much of a stretch to realise that Mr Monti himself is the likely target of political campaigning as the economy has visibly weakened further under his leadership. That’s not to say that instigation of structural reforms, if followed through, won’t have a long term positive affect but it’s an easy target for Berlusconi. Last night’s industrial production was an example:

Italian industrial output fell more than expected in October after stabilising in the third quarter, suggesting the prolonged recession in the euro zone’s third-largest economy is set to deepen in the final months of 2012.

Yet more evidence of recession is sure to be a key factor in the election campaign now getting underway in Italy following Saturday’s announcement by Prime Minister Mario Monti that he will resign in the next few weeks.

Output sank 1.1 percent month-on-month after an upwardly revised 1.3 percent fall in September. The figure missed all forecasts in a Reuters survey of analysts that spanned -0.6 percent and +0.5 percent and averaged -0.2 percent.

Production fell heavily across all industrial sectors, particularly in durable consumer goods, national statistics office ISTAT said.

But it isn’t just Berlusconi. The Democrat party,  Beppe Grillo’s Five-Star movement , Lega Nord , LSE and IDV  all have some form of anti-austerity and/or anti-euro platform and the election already has a similar vibe to this year’s Greek election in which Syriza almost stole the show. Something to watch closely in the New Year without a doubt.

In other news, Cyprus looks set to be troika-fied, Greece is still trying to stumble over the line on its buy-back and Portugal reported a deterioration in economic conditions in Q3. However, in some rare good news Greece’s Industrial production index continues to rise, although there is obviously a long way to go.

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  1. It’s more a Monti cliff rather than a Berlusconi one.

    Italy’s history of short term coalition governments not seeing full terms without significant change in coalitions is going to make next year quite interesting, but it may be that the general population hasn’t suffered enough austerity yet to willingly overthrow the Euro dream.

    On the other side, Italy probably would benefit from being a sovereign currency issuer as it has an industrial base that could benefit from devaluation. Italian industrialists could be very supportive of someone who will lead an anti-Euro coalition.

  2. Berlusconi is the Charlie Sheen of Italian politics.

    Current polling would suggest Spanish bonds would be a better bet.