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Italian Presidential Election : Political Uncertainty And Tail-Risk Event For Markets

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  The process to elect a new Italian president is about to kick off. The date of the ballot will be announced on 4 January. Expect voting to start in the third week of January. This is usually a non-event. This time is different. Incumbent president Sergio Mattarella, who is eligible for another term, will not run. He will step down on 3 February. Current Prime Minister Mario Draghi is the frontrunner to succeed him. This would trigger snap elections and a new period of political instability for Italy, at the worst moment ever. This is certainly the first time in recent history the Italian presidential election is economically relevant. This is potentially a tail-risk event for financial markets.


A wide-open race : There are no official candidates in Italy’s presidential elections. Lawmakers of both houses of parliament along with regional representatives cast secret ballots – they can vote for anyone as they are an Italian citizen and aged 50 or over. In previous ballots, names that have cropped up have included the porn actor Rocco Siffredi and the famous actress Sophia Loren, for instance. The election requires a two-thirds majority in the first round and an absolute majority in the rounds afterwards if consensus is hard to reach. In recent months, Draghi has been floated as the frontrunner. On 22 December, he opened the door for the first time to stand as a candidate. He described himself as « a grandfather at the service of the institutions ». Other potential candidates are the current justice minister and former judge at the Constitutional Court Marta Cartabia and three former Prime Ministers (Romano Prodi, Paolo Gentiloni and Silvio Berlusconi). Only Berlusconi is officially running for the position. History teaches us that most of these names mentioned in the lead-up to the vote are there to get burnt, with the exception of Draghi and perhaps Berlusconi who has unparalleled vote-buying skills. The race is therefore wide open and potentially full of surprise. Last week, Giuseppe Conte, leader of the far-right Five Star Movement, which is the largest group in parliament, indicated his preference for a woman as a new Italian president. Advantage Cartabia, in theory. This would be symbolic. About 65% of lawmakers are men. This is a strategic move for Conte too. According to the latest polls, his party would face a crushing defeat in case of snap elections. Two other parties are against the Draghi option : Berlusconi’s Forza Italia and Matteo Salvini’s anti-immigration and eurosceptic League. Others are undecided : Giorgia Meloni’s Brothers of Italy, Enrico Letta’s Democratic Party and Matteo Renzi’s Italia Viva. Most Italian political leaders would rather favor another option than Draghi. Investors would prefer Draghi to serve until the end of his term too. But there is no consensus around another name, for the moment. It is still early days, fortunately.

Draghi’s job is not done : Draghi’s brought political stability to Italy. He is dealing well with the health crisis and its consequences. He has also completed and validated the arduous process of defining projects and meeting initial targets and reform objectives to access funds under the Next Generation EU recovery package. Italy is the largest beneficiary. It should receive the first payment out of a total of €191.5bn (both loans and grants) soon. But there is more to do. Draghi hasn't had time to address the structural issues of the Italian economy yet. The slowdown in productivity is one of them. OECD data show Italian companies with fewer than 10 employees, which constitute a large chunk of Italy’s business model, have lower levels of labor productivity than their peers. On average, the value added per employee in Italian companies versus German companies is 35% lower in Italy than in Germany. Some possible causes of Italy’s poor productivity are the low level of spending in research (1.4% of GDP in 2018 against 2.4% in the average of the OECD countries according to the latest available data) coupled with insufficient investment in education and the accumulated delay in the adoption of new technologies. In this respect, the investments identified by the Italian government (see table below), which will be financed by the Next Generation EU recovery package, could represent a great opportunity to increase labor productivity growth. The implementation of these investments will require political stability that only Draghi can bring, in our view.

Main investments to increase growth and productivity identified by the Italian government (initially presented in Autumn 2020 by former Prime Minister Giuseppe Conte)

Energy transition

€74.3bn to invest in renewable energy generation and energy efficiency in line with the European Green Deal’s objectives

Digitalization and Innovation

€48.7bn for the digitalization of the public administration and to support firms’ vertical integration so as to increase competitiveness

Health

€9bn for first-line medical assistance and general practitioner services

Infrastructures

€27.7bn for sustainable urban mobility and infrastructure investments. It includes investments in the high-speed rail network and highways with attention to smart districts

R&D funding

€19.2bn for education and research

Source : Italy’s Ministry of Economy and Finance, Saxo Bank Research & Strategy

What if ? If Draghi is elected president, this would bring the general election forward by a year, in 2022 instead of 2023. Opinion polls suggest snap elections could hand the victory to far-right parties (the League and the Brothers of Italy) allied with Forza Italia. This might lead to a new period of political instability in Italy, at the worst time ever. The Italian presidential election is not on investors’ radar yet. But expect a hard awakening and market turmoil and bond volatility in the BTP market in case of snap elections.

Other elections taking place in 2022 :

·       Portuguese legislative elections (Jan. 30)

·       Hungarian parliamentary election (April – exact date to be confirmed)

·       French presidential election (Apr. 10)

·       French legislative elections (Jun. 12)

·       Japan house of councilors election (July 25)

·       Brazil general elections (Oct. 2)

·       U.S. midterm election (Nov. 8)

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