Italy Set for New Government -- Then a Snap Election: QuickTake

(Bloomberg) -- More than two months after elections that produced a hung parliament, Italy is finally getting a new government. It’s not likely to last long. President Sergio Mattarella is going to name a non-partisan administration, one led by an unelected prime minister, with hopes it can survive until the end of the year. Mattarella faces objections by the anti-establishment Five Star Movement and the anti-immigrant League, which tried but failed to turn their electoral success into a coalition government. They want new elections as soon as July. Any prospect of tackling the ills of the euro region’s third-biggest economy -- including massive debt and a troubled banking system -- is on hold.

1. When does Italy get a new prime minister?

Mattarella is likely to name the head of what he calls “a neutral government” as early as Wednesday, according to a senior state official who declined to be named discussing strategy. That person will be Italy’s fifth consecutive unelected premier -- after Mario Monti, Enrico Letta, Matteo Renzi and Paolo Gentiloni -- and this will be Italy’s 65th government since World War II. The winner of the 2013 election, Pier Luigi Bersani, failed to forge a majority and was supplanted by Democratic Party colleague Letta. .

2. Who will get the job?

Mattarella wants a figure who has authority in economics and/or foreign affairs, and who can put up with the rough-and-tumble of Italian politics -- especially as he or she will come under attack from populists. This could be Italy’s first woman prime minister. Potential names include Elisabetta Belloni, secretary-general at the Foreign Ministry who served as chief of staff when the outgoing premier Gentiloni was foreign minister; Carlo Cottarelli, formerly an executive director at the International Monetary Fund; and Marta Cartabia, deputy head of the Constitutional Court.

3. How will this neutral government work?

After Mattarella names a prime minister seen as being outside any party structure, that person then applies the same standard in compiling a list of potential cabinet members. The list goes to Mattarella, who makes the appointments.

4. How long will the new government last?

That depends. The new premier will have to go before parliament for a confidence vote and will lose unless either Five Star’s Luigi Di Maio or the League’s Matteo Salvini -- who also heads a broader center-right alliance -- drop their opposition. The two populist parties were the biggest winners in the March elections, which saw Gentiloni’s Democratic Party routed. If the premier loses the confidence vote, Mattarella will dissolve parliament. Elections would be held as early as 60 days after that, giving the two ascendant populist parties a chance to strengthen their positions.

5. Who would likely win?

Opinion polls show the League -- the rebranded, formerly secession Northern League, once known for deriding residents of the country’s south as beggars, thieves and good-for-nothing rednecks -- has gained the most from two months of bargaining. Its support rose to 24.4 percent from 17.4 percent in the March vote, according to an SWG opinion poll carried out May 3-6. Five Star is still the biggest single party, slipping half a percentage point to 32.2 percent. (A center-right alliance including the League and the Forza Italia party of Silvio Berlusconi, the four-time former prime minister, rose to 38.5 percent from 37.1 percent.) If Salvini’s League strengthens in the next election, he could decide to break with Berlusconi and finally form a coalition with Di Maio. This time around, Di Maio’s insistence on excluding Berlusconi was a primary obstacle to a populist coalition government.

6. Why does this matter?

Italy is facing political decisions and economic problems that affect other nations too. At more than 130 percent of gross domestic product, Italy’s debt is second-highest in the euro area, after Greece. The European Commission called the debt “a major source of vulnerability” for Italy and has been overseeing the country’s efforts to reduce spending. Underlying problems remain in Italy’s banks, including cronyism with many lenders too entwined with politicians, unions and foundations of all shapes. Mattarella has warned that the timing of the next elections could jeopardize the 2019 budget, which has to be approved by the end of the year, and unsettle financial markets. And nobody’s fully forgotten Five Star’s past talk of a referendum on leaving the euro.

7. Are the markets going to lose patience?

Italian bonds and stocks slumped the most in weeks as Mattarella’s planned nonpartisan government looked unlikely to win a confidence vote. “If a July election materializes, then a larger political risk premium will have to be factored in,” said Marc Ostwald, a strategist at ADM Investor Services. “There seems little reason to believe that a new vote will not yield a similar result to the last one.” Until recently, bonds and stocks had shrugged off the political turmoil, with investors focusing instead on improving economic growth and continued support from the European Central Bank’s unprecedented package of easing measures.

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