Voters went to the polls in February, and the electorate’s rejection of the austerity program carried out by a technocratic regime backed by both of the main political parties resulted in a hung parliament. The anti-euro Five Star Movement, headed by irreverent comedian Beppe Grillo, made a stunning third-place finish.

The center-left alliance headed by Pier Luigi Bersani’s PD won an outright majority of 345 seats in the 630-member Chamber of Deputies. But failed to match that feat in the Senate.

Given the damage to confidence that would result from the formation of a government that was not at least theoretically committed to doing whatever is necessary to ensure Italy does not become a threat to the survival of the euro zone, the only viable path forward was the formation of a coalition of the PD and the PdL, which ultimately was the result of negotiations. However, that result required Bersani’s replacement as leader of the PD by Enrico Letta and President Georgio Napolitano’s agreement to remain in his post for another term.

Businesses can expect few favors.

The marriage of the ideological rivals will be unstable, which is anything but unusual in Italy. But in this case, it holds the potential to cause significant and lasting damage to the country’s economic health.

Chronic uncertainty, including a high probability that the coalition will meet an early demise, will create a barrier to lowering borrowing costs. This prospect dims the outlook for a revival of gross fixed investment, which contracted by almost 9 percent in 2012, and is sure to shrink again this year.

Otherwise, businesses can expect few favors, as bouts of fiscal slippage are likely to extend the austerity program beyond the current timeline. And political dysfunction will slow the progress of structural reforms needed to boost Italy’s competitiveness.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.

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