Monti’s decision to run for office to reduce Italy’s political risk, Barclays

The decision of Italy’s prime minister Mario Monti to lead centrist parties may reduce the risks of political impasse at the country’s general elections in February, according Fabio Fois, economist at Barclays.

Electoral polls published at the end of December indicated that Monti’s decision to lead political parties that accept and support his reformist agenda has boosted the popularity of these centrist parties.

As a consequence, Fois said, the enhanced political support of the centrist parties – Union of Center (UDC), Italia Futura (IF) and Futuro and Libertà (Fli) – could be crucial for the stability of the next government, particularly in the Senate where the leading coalition formed by Democratic Party and Left Ecology Freedom may struggle to secure an outright majority.

“Control of both the Congress and the Senate is crucial in Italy as the government must secure the consent of both to remain in office,” the economist said.

As the bank already stated in a December report, a scenario where a government coalition was unable to secure a strong majority in both the Chambers was more than a tail risk.

“In fact, while a centre-left coalition formed by PD (Democratic Party) and SEL (Left Ecology Freedom) was leading in the polls, the very different electoral systems of the two chambers make it possible for no clear majority to be reached in the Senate, even if a majority were secured at the Lower Chamber,” Fois added.

Polls available at the beginning of December were indicating that while in the Lower Chamber the PD and SEL were likely to secure an outright majority, a centre-right coalition formed by PDL and NL (People of Freedom/Northern League) would still be in a position to win a good portion of the votes in some Northern regions, thereby making the outcome of the Senate extremely difficult to predict.

According to Barclays, the political outlook has changed since Mario Monti announced his intention to patronise those parties that accept and support his proposed agenda.

While a PD-SEL coalition still leads in the polls, a federation of centrist parties led by Mario Monti is estimated to be the second most important political body in Italy, overtaking the rest of the political forces, including a centre-right coalition comprising PDL and NL.

“We continue to think that financial markets will remain focussed on structural reforms. A stable political outlook is a necessary condition for reforms to be decisively implemented. As we argued, while structural reforms approved by the outgoing government were a step in the right direction, Italy still requires decisive action to eradicate long-standing impediments to higher potential GDP growth,” Fois said.

He also added some warnings on this outlook, as this estimates are conditional on a number of events and assumptions which could alter remarkably the outcome of the analysis.

“Mario Monti’s announcement to lead political parties that accept and support his reformist agenda was made on December 23, and electoral polls carried during holiday period tend to be less reliable owing to their different sample size and composition,” he added.

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