Italy Risks New Turmoil as President Paves Way for Election

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(Bloomberg) -- President Sergio Mattarella set Italy on the path to a national election likely in March that could lead to a hung parliament and a long period of political turbulence.

Mattarella met Prime Minister Paolo Gentiloni at the presidential palace in Rome shortly after the premier told a traditional end-of-year news conference that Italy’s election campaign is “imminent.”

Mattarella and Gentiloni discussed a decree to dissolve parliament due to be signed later on Thursday, and elections likely on March 4, according to a state official who couldn’t be named discussing private matters.

Gentiloni said at his news conference that Italy had managed to avoid “an abrupt end” to the five-year legislature “at a very delicate time in which the economy and our society in general were licking their wounds after a long recession.” Later Thursday, Gentiloni’s government will choose the date of the election.

Hung Parliament

The euro zone’s third-biggest economy, whose recovery is trailing most of its peers, risks a hung parliament after the ballot. Opinion polls show the anti-establishment Five Star Movement, which wants a consultative referendum on abandoning the euro if European Union treaties aren’t renegotiated, leading Gentiloni’s Democratic Party and groups in a possible center-right coalition that would include former Premier Silvio Berlusconi’s Forza Italia.

But neither Five Star, the Democrats headed by former Prime Minister Matteo Renzi, nor the center-right bloc would win a parliamentary majority, according to the surveys. A possible “grand coalition” of the Democrats and Forza Italia would not have a majority either.

“It’s virtually certain that we won’t have a clear majority,” said Sergio Fabbrini, director of the school of government at Luiss University in Rome. “The talks to verify whether a new majority can be formed could last until the summer. In Germany, the talks have dragged on for ages, and in Italy we may end up with about twice as many parties in parliament as in Germany.”

Political Instability

Equity and fixed-income markets have come under pressure in recent months because of the risk of political instability ahead. The yield on Italy’s 10-year benchmark bond is currently the highest in the euro zone except for Greece. The yield rose 1 basis point to 1.93 percent at 4 p.m. local time Thursday after Gentiloni said the election campaign is imminent.

Italy’s main equity index, the FTSE MIB, was little changed Thursday. The measure has gained 15 percent this year and is the best performer among major European stock indexes.

Five Star wants Mattarella, whose task is to appoint a premier, to give it a mandate to try to form a government -- Italy’s 65th since World War II -- if it wins the most votes. However, Five Star has ruled out creating a coalition, saying it would instead seek external backing for its policies from all political forces.

Mattarella is under no obligation to hand a mandate to the leader of the party which comes out on top, the state official said. The president may first seek to establish whether parties can agree on a coalition with enough seats to govern, the official added. Mattarella’s options also include reappointing Gentiloni to lead a new government until fresh elections.

At his news conference, Gentiloni side-stepped a question on whether he could serve at the head of a “grand coalition” after the vote. “Anything I say would be used against me,” he said. “I hope that my political group will obtain a great result and that this allows the formation of a government.”

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