SURVEY REPORT: Economists Map Out Italian Election Probabilities

(Bloomberg) -- Italians head to the polls on March 4, but with a hung parliament the likeliest outcome, there’s a one-in-four chance they’ll be right back to where they started within a year.

Economists assigned a 38 percent probability of a hung parliament, followed by a one-in-three chance of a so-called “grand coalition” between the ruling Democratic Party of former prime minister Matteo Renzi and the more conservative Forza Italia, led by billionaire and four-time premier Silvio Berlusconi.

There’s a 26 percent chance of an inconclusive March vote followed by a repeat election within six months to a year, according to the survey.

The “grand coalition” was widely seen as the most beneficial outcome in terms of European Union relations, which are strained over concerns about government deficits, business investment and protecting lackluster Italy’s recovery.

“Our baseline scenario remains that the new government, probably a grand coalition type of government, will only make some small improvement in productivity going forward,” wrote Nicola Nobile, a senior economist at Oxford Economics in Milan. “Potential output growth will be capped at one percent, resulting in Italy remaining one of the laggard countries in the euro area.”

Should the center right, led by Forza Italia, fail to carve out a working majority, 86 percent of respondents said it would break its current alliance with the Northern League to pursue another arrangement such as a pairing with the Democratic Party. There is a 22 percent chance of a center-right majority government, seen as second-best in terms of business investment and the overall economy.

The populist Five Star Movement, which recent polls project will win the most votes of any party, and which once had called for a referendum on discarding the euro, has an eight percent probability of taking power, according to the survey. Economists strongly agreed that this would be the worst outcome across several key policy areas.

As for what Italy’s next government should make its top priority, over half of respondents recommended avoiding a clash with the EU over increased spending for public investments.

“The paradox here is that a hung parliament and prolonged negotiations will lower significantly the probability of a clash with the EU over public finance targets,” wrote Gianluca Sanna, a senior economist at Banca Monte Dei Paschi Di Siena in Milan. “In fact, that would keep (current prime minister Paolo) Gentiloni’s government in charge through April, when the adjustment to the 2018 budget must be detailed.”

Full Survey Results

1.1) What are the chances of each of the following outcome scenarios to the Italian general election scheduled to be held on March 4.

ResponsesMedianAverageHighLow
Hung parliament and prolonged negotiations154038605
Center-right majority (led by Forza Italia)152022458
Grand coalition: Forza Italia + Democratic Party153533600
Five Star Movement-led government15108200

1.2) Should the center right win a plurality but still far short of an overall majority, do you expect Forza Italia to break its alliance with the Northern League in order to pursue forming a government with another party (i.e. Democratic Party in a grand coalition)?

Response Count:14100%
Yes1286%
No214%

2.1) What is the best/worst outcome of the elections for the following ?

RankEU relationsBusiness investmentItaly’s recovery
1 - Best/most favorableGrand coalitionGrand coalitionGrand coalition
2Hung parliamentCenter-right majorityCenter-right majority
3Center-right majorityHung parliamentHung parliament
4 - Worst/most detrimentalFive Star Movement gov’tFive Star Movement gov’tFive Star Movement gov’t

Note: Shows whichever outcome was assigned the most of a given relative rank.

3) Given the current distribution of the Italian public debt (majority held domestically), will a worst-case scenario election outcome significantly impact the rest of the euro region like at the peak of the debt crisis in 2011-12?

Response Count:15100%
Yes00%
No15100%

4) Do you think that the ECB’s QE program can shield Italy from the risk of an economic or financial crisis in the next 6 to 12 months, even if there’s a hung-parliament or a new government that unsettles markets?

Response Count:15100%
Yes1173%
No427%

5) What should be the top priority for the next government in order to boost the Italy’s economic activity/recovery?

Response Count:13100%
Reaching a deal with the EU to exclude investments from the calculation of public deficit18%
Avoiding a clash with the EU on increased spending for public investments and favoring private investments through a review of existing tax incentives862%
Stimulating domestic demand with tax cuts and/or income-support measures for the poorest section of the population215%
Other (see individual responses attached)215%

6) What is the probability of an inconclusive March vote followed by a repeat election within six months to a year?

Response Count:15
Median estimate20%
Average estimate26%
High estimate50%
Low estimate10%

Individual responses are found in an attachment to this story.

©2018 Bloomberg L.P.

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