A man reads a newspaper after the Italian vote on constitutional reform referendum in Rome, Italy. (Photographer: Chris Ratcliffe/Bloomberg)

Snap Italy Election Raises the Risk of Populists Taking Control

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(Bloomberg) -- Italy is heading for a snap election that may boost the chances of a populist government taking power.

Luigi Di Maio, head of the anti-establishment Five Star Movement, and Matteo Salvini, who leads a center-right alliance and the anti-immigrant League, are pressing for an election in July after efforts to form a government broke down. The populist rivals met in Rome Monday for the first time in since the March election following weeks of phone contacts.

Italian bonds fell by the most in two months.

“Early ballots would change the outlook of political risk,” Barclays Plc senior European economist Fabio Fois wrote in a note to clients. “An outright anti-system government between Five Star and the League could be increasingly likely.”

Although both parties are now gearing up to fight a campaign, their talks point to a potential tie-up after the next vote, especially if they emerge strengthened. President Sergio Mattarella is trying to resist the populist tide.

The 76-year-old former constitutional court judge, sponsored as head of state by the center-left Democratic Party, wants lawmakers to back a “neutral government” to steady the ship before going to the polls again and is set to name a premier-designate Wednesday, according to a senior state official. Mattarella said Monday he wants to hold off elections for the rest of the year since turnout might suffer in a summer vote, and a fall date would jeopardize the 2019 budget.

Salvini Gains

The spread between Italy’s 10-year bonds and similarly dated German bunds widened by as much as 10 basis points Tuesday to 133 basis points, compared with 114 basis points two weeks ago.

Salvini has been the main beneficiary so far of the post-election quarreling. The League has seen support rise to 24.4 percent from 17.4 percent on polling day, according to an SWG opinion poll published Monday.

Five Star is still the most popular single party, slipping half a percentage point to 32.2 percent, while the center-right alliance headed by the League rose to 38.5 percent from 37.1 percent. Salvini has been stealing support from his ally Silvio Berlusconi, who’s seen his Forza Italia party slip to 9.4 percent.

With the outgoing Democratic Party holding steady at about 19 percent, there’s also a risk that another election would produce another political stalemate, leaving the country potentially ungovernable. That’s the problem that Spain faced after successive elections in 2015 and 2016 before Mariano Rajoy managed to secure enough support for a second term.

Salvini’s loyalty to Berlusconi has been one major factor in the stalemate of the past two months. While Five Star and the League have both expressed interest in a populist alliance, Di Maio insisted Salvini ditch the 81-year-old former prime minister, whom Five Star sees as a symbol of the country’s corrupt political establishment. That blockage might be shifted if the balance of power changes in a new parliament.

Populists’ Bet

Di Maio said Tuesday he’s still open to forming a government with the League in coming days, though Berlusconi remains a dealbreaker.

“If someone wants to start from what is good for the country, we’re available,” Di Maio told RTL 102.5 radio. Asked about a populist coalition after repeat election, he said, “it’s improbable, because Salvini won’t unglue himself from Berlusconi.”

Di Maio and Salvini may be betting that their voters are more likely to turn out for a summer election than supporters of the establishment parties, whose fortunes are on the wane. They may also seek to capitalize on Mattarella’s efforts at compromise -- and a possible stillborn government -- denouncing it as another establishment stitch-up like the unelected administration of Mario Monti that stepped in from 2011 to 2013 to steer Italy through the height of the financial crisis.

Playing for Time

Potential premiers floated by newspaper Corriere della Sera on Tuesday included Elisabetta Belloni, 59, secretary-general at the Foreign Ministry who had served as chief of staff when Paolo Gentiloni, the outgoing prime minister, was foreign minister; Carlo Cottarelli, formerly in charge of the government’s spending review and previously an executive director at the International Monetary Fund; and Marta Cartabia, 54, deputy head of the Constitutional Court.

While the president’s nominee could be sworn into office this week or next, he or she would then have to face a confidence vote in parliament within a few days of that ceremony. That vote would be lost unless either Di Maio or Salvini drop their opposition. The defeated premier would then return to Mattarella, who would dissolve parliament.

From the day Mattarella dissolves parliament, at least 60 days have to pass before elections can be held, partly to ensure enough time to ensure Italians living abroad can vote.

©2018 Bloomberg L.P.

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