Why Italy Is Headed for Yet Another Early Election

(Bloomberg) -- Political turmoil in Italy spurred snap elections in 1994, 1996 and 2008. Now, another one appears to be around the corner. Near-constant sparring between unlikely bedfellows Matteo Salvini and Luigi Di Maio, who’ve shared power as deputy premiers in a populist coalition led by Premier Giuseppe Conte, has come to a head, with Salvini taking steps toward bringing down the government and calling for “swift” early elections. But Conte is seeking a vote in parliament before resigning, and that has major implications for Italy’s budget -- a shared concern for the full European Union.

1. How did it come to this?

Salvini, head of the anti-migrant League, and Luigi Di Maio, leader of the insurgent Five Star Movement, clashed on nearly everything during just over a year in government together. Conte, an unelected professor, was plucked from obscurity to mediate between the two coalition partners. Salvini emerged as the stronger political force, especially after the League trounced Five Star in European parliament elections in May. He’s increasingly been seen as Italy’s de facto leader.

2. What’s next?

Italians traditionally flock to the seaside in August, but lawmakers may soon have to swap swimsuits for working attire, as parliament will likely be reconvened from its summer recess. A confidence vote on the government could take place the week of Aug. 12 or the following week. If Conte loses that vote, the ball would be in President Sergio Mattarella’s court. After consultations, Mattarella could dissolve parliament at some point in late August.

3. Could the current government survive a confidence vote?

There’s a slim chance a ragtag coalition of left- and right-wing opposition parties, plus Five Star, will back Conte. If so, a temporary “guarantee government” could manage the transition to new elections and possibly handle the 2020 budget in the meantime. That matters, because Salvini’s fiscal promises -- heavy tax cuts, a vast public works program, some further lowering of the age for pension eligibility -- appear incompatible with the budget demanded by the European Commission and expected by investors.

4. Why is the EU involved?

Member countries had to pledge to maintain sound public finances in order to join the euro. Italy is under special scrutiny given its vast public debt and got a formal warning in May from Brussels that it could face penalties for exceeding debt limits or busting its budget. The Commission ultimately decided to withhold disciplinary measures.

5. Who will oversee the 2020 budget?

Unclear. Finance Minister Giovanni Tria could remain in office as a caretaker until a new government is in place, but he would have limited powers. Whoever succeeds him -- euroskeptics Claudio Borghi and Alberto Bagnai could be among Salvini’s picks -- would probably rewrite the whole spending plan.

6. What does this mean for markets?

Investors craving stability from Italy could be in for more disappointment. Italian bonds plunged on Aug. 9 on the prospect of political uncertainty and a new vote. Salvini has shown no intention of abiding by the EU budget rules. A new, bruising clash with Brussels cannot be ruled out. And that’s not even considering the vocal euroskeptic faction within the League, which advocates taking Italy out of the single currency.

7. When could a snap election be held?

Salvini wants it as soon as possible. The earliest option would be Oct. 13, since it takes 60 to 70 days after parliament is dissolved to organize a general election. But if a caretaker government is in place to steer through the 2020 budget -- which must be submitted to the European Commission by Oct. 15 -- elections could be pushed back to November or even later into 2020. Last year’s budget process led to a weeks-long standoff with the commission.

8. Who would run?

Salvini, for sure. He plans to run to be the next prime minister, has been in campaign mode for weeks, and has kicked off a summer campaign tour of seaside spots across the country. It’s far from clear who the other contenders will be. Five Star is in disarray after its disastrous showing in the European Parliament elections; Di Maio may face an internal revolt and could be replaced by Conte or firebrand Alessandro Di Battista. The opposition Democratic Party is now led by Nicola Zingaretti, but ex-premier Matteo Renzi might try to stage a comeback. And then there’s Silvio Berlusconi, who at 82 is looking for one last hurrah. His Forza Italia is split between loyalists and those who want to side with Salvini.

9. Could Salvini win outright?

He’s in the driver’s seat, with the League polling just shy of 40%. Under Italy’s hybrid electoral system, that might just be enough to give him an outright majority in both branches of parliament. An alliance with the far-right Brothers of Italy promises a safer majority. Add Forza Italia to the coalition and Salvini might even get the two-thirds majority needed to amend the country’s constitution.

The Reference Shelf

• QuickTake explainers on the League and Five Star.
• Why Italian politics keeps roiling financial markets.
• Italy is just the latest country willing to test the EU’s fiscal rules.
• Italy is finally facing its moment of truth, writes Bloomberg Opinion columnist Ferdinando Giugliano.

To contact the reporter on this story: Alessandro Speciale in Rome at aspeciale@bloomberg.net

To contact the editors responsible for this story: Richard Bravo at rbravo5@bloomberg.net, Jerrold Colten, Laurence Arnold

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