Silvio Berlusconi is using a new alliance with the Northern League party to revive his electoral muscle, raising the threat of a hung parliament and fresh financial turmoil in the euro zone.
Italy's late February election is shaping up to be the most crucial vote in Europe this year, more so than the September elections in Germany, where Chancellor Angela Merkel's popularity remains high. If there is no clear winner, Italy's reform program could stall, raising the possibility that the euro crisis could return with force after a period of relative calm since last summer.
Bond markets are already reflecting the threat of political turmoil in Italy. The yield on the benchmark 10-year bond climbed 0.09 percentage points Monday, reaching 4.35 per cent.
Yields have fallen 2.8 percentage points in the past year, removing the sense of crisis in Italy's debt markets even if borrowing costs remain uncomfortably high for a country saddled with €2-trillion ($2.6-trillion) in debt and a recession that was forecast to shave 2.3 per cent from gross domestic product in 2012.
Mr. Berlusconi, 76, was prime minister until he was replaced 14 months ago by Mario Monti, 69, near the height of the Italian debt crisis that had threatened to sink the euro zone's third-largest economy. At the time, his party, People of Liberty (PdL), was abandoned by the Northern League, its historic coalition partner. That partnership was renewed Monday, giving the fresh coalition a strong showing in the polls.
According to a poll conducted by Tecne for SkyTG24 television, the PdL and the Northern League together would win about 28 per cent of the vote if the election were held today. That's twice the popularity of Mr. Monti's centrist bloc, the one favoured by Italian business, the Vatican and Europe's political leaders, among them Ms. Merkel, whose distaste for Mr. Berlusconi and his tax-cutting economic agenda is well known.
The centre-left parties, dominated by the Democratic Party (PD), headed by Pier Luigi Bersani, are in the lead, with 30 to 40 per cent. The Five Star Movement, led by comedian and anti-austerity activist Beppe Grillo, is in fourth place, with about 14 per cent. But with six weeks to go, and an enormous number of undecided voters, the winner of the election is an open question.
The Italian election is shaping up to be the most crucial vote in Europe in 2013, more so than September elections in Germany, where Ms. Merkel's popularity remains high. If there is no clear election winner, Italy's reform program could stall, raising the possibility that the euro zone crisis will return with force after a period of relative calm since last summer.
The resurgent Mr. Berlusconi, who first became prime minister in 1994, ushering in a long era of anemic growth and rising debt and budget deficits, threatens to deny Mr. Bersani an outright victory. While the centre-right stands to take the lower house, the chamber of deputies, he could be denied a majority in the Senate, the upper house. (In Italy, a party or coalition needs a majority in both to govern).
European leaders and investors would like a clear-cut victory by Mr. Bersani, who has a credible record for economic reform in previous centre-left governments, or by Mr. Monti's centrists. To raise his popularity, Mr. Monti, a former European commissioner who has never held elected office – he led a technocrat government until his resignation last month – has been moderating his harsh, German-inspired austerity stance.
In a note, Société Générale SA economist James Nixon said Mr. Monti has "begun to emphasize that the focus of policy should shift away from austerity to growth, now that the sense of crisis has eased."
On SkyTG24 television Sunday night, Mr. Monti said "taxes need to be cut, but no one should be making promises that cannot be kept."
Specifically, he said there is the "possibility" or reducing the national income tax (known as IRPEF) by one percentage point, freeze the value-added tax, which was raised by his government, and restructure the hated property tax that he introduced. Doing so does not necessarily mean he will cut it; it does mean that a greater proportion of the property tax might be set aside for struggling municipal governments.
By agreement with the Northern League, which is based in Milan and advocates fiscal autonomy from the rest of Italy, Mr. Berlusconi said he would not be a candidate for prime minister if the centre-right wins.
He proposed Angelino Alfano, his party secretary, as prime minister. The Northern League, however, has proposed Giulio Tremonti, who was finance minister in the last Berlusconi government. Mr. Berlusconi has said he is willing to serve as finance minister, an appointment that would not sit well with euro zone leaders, who blame him for Italy's precarious economic position.