Italy's general election will take place on Feb. 24-25. Voters will elect 945 members of parliament, who then approve a new government. That much is certain. Almost everything else is up in the air. Breakingviews asks the questions, and does its best to answer them clearly. Warning: in Italy, nothing is simple.
Yields on Italian sovereign debt have fallen to pre-crisis levels. Do the elections really matter to investors?
While yields are no longer dangerously high, political stability remains crucial. GDP growth is key to reducing the scale of Italy's debt, currently 126 per cent of GDP; economic reforms are necessary for growth and impossible without strong political leadership. The election gives Italians an opportunity to continue the austerity-cum-reform agenda of Mario Monti, the technocratic incumbent Prime Minister. At the other extreme, they could return to the stasis of Mr. Monti's predecessor, Silvio Berlusconi, whose government ended with political stalemate, rising bond yields, and a forced resignation.
So who is most likely to win?
In the opinion polls, the coalition led by Pier Luigi Bersani's centre-left Democratic Party (PD) garners just shy of 40 per cent of votes. A victory by Mr. Bersani may not be a bad thing – he promotes a similar pro-Europe, pro-growth message to France's François Hollande, but also has pedigree as a reformer in Romano Prodi's government. The emergence of a new centre-left government in Italy could help shift euro zone policy away from German-style austerity. But investors might worry that the government could be held back by a need for support from the trade union CGIL. The one thing that can be said with almost total certainty is that Mr. Bersani will win the lower house, thanks to the electoral law that gives the leading coalition additional seats.
So Mr. Bersani wins, then?
Not so fast. The Italian parliament is divided between the lower house, the Chamber of Deputies, and the Senate, and a government needs a majority in both. The fate of the next government could be decided by a handful of states which command a relatively large number of seats, such as Lombardy and Sicily. That's where Mr. Berlusconi comes in.
I thought he was hounded out of office?
He's back. Mr. Berlusconi's party lost ground during the Monti regime following a series of scandals, but it has since staged a surprise comeback in the polls, thanks perhaps to Mr. Berlusconi's anti-euro, anti-German rhetoric. Mr. Berlusconi is extremely unlikely to win; his strategy seems to be to create a blocking position in the Senate, potentially leading to political stalemate.
What about Mr. Monti? Wasn't he supposed to be a candidate for PM?
Mr. Monti was still the most popular politician in Italy at the end of his short technocratic regime. But his transition to mainstream politics has been hard. His new centrist grouping seems to have stalled at around 15 per cent of the vote.
What's going to happen?
There are two likely scenarios. The PD could win a majority in both the Senate and lower house. Alternatively the PD may be forced to form an alliance to control the Senate. Paradoxically, Mr. Berlusconi's return may simply end up helping Mr. Monti, if the consequence is that the PD is compelled to form a coalition with the centre. Having Mr. Monti in the next government would certainly please markets.
Are markets too optimistic?
The worst outcomes – total political stalemate or the emergence of an anti-euro government – look unlikely, even if the final result is hard to predict with certainty. At the very least, the election campaign is likely to lead to more worrying rhetoric, particularly from the Berlusconi camp. That could make for some messy weeks ahead.