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Growing political turmoil in Italy – the ailing euro periphery’s largest and most important economy – could be a dealbreaker for any sort of ECB plan to save the euro.The newsflow out of Italy has been relatively quiet lately as investors focus their near-term concerns on event risks in Greece and Spain.
At this point, the biggest event everyone is waiting for next is the ECB meeting September 6, during which many analysts expect the ECB to lay out the specifics of a plan to intervene in Spanish and Italian bond markets in order to prop up the floundering governments that are struggling to secure financing needs.
But the key prerequisite to any such intervention, as ECB chief Mario Draghi explained in August, is that those governments must first request bailouts from the EU’s current bailout funds, the EFSF and the ESM (the latter of which still needs to be ratified by Germany on September 12).
Spain, which has become the focal point of the euro crisis, is expected to request a bailout sometime after the September 6 ECB meeting if the central bank presents an intervention plan.
However, in Italy, the process may not be so straightforward, and political turmoil could threaten to derail future negotiations over an Italian bailout that would allow the ECB to support the country’s government financing needs when the time comes.
In a note to clients this morning, Citi economist Jürgen Michels explains how an ongoing debate over election law reform is critical for Italy’s stability prospects ahead of its April 2013 elections:
With Italian PM Mario Monti due to step down in 2013 ahead of the Spring general elections, the lack of progress on the reform of the country’s electoral law, which at present grants a large degree of power to party leaders, continues to intensify concerns over political instability.
Under the current electoral law approved in 2005, voters cannot choose candidates directly, voting instead for a fixed list selected by party leaders under a proportional system which enables leaders to select their favoured candidates. In addition, the law awards a large premium to the winning party/coalition, guaranteeing a strong Parliamentary majority to the party that comes first.
Although most MPs want to see the rules amended, there is disagreement between the various parties on what to replace it with. Italians’ disapproval of the current system and politicians’ lack of agreement on how to amend it, could therefore impact the outcome of next year’s election, thus intensifying the markets’ fears that Italy will be engulfed in deep political instability ahead of next year’s election.
As Citi political analyst Tina Fordham noted recently while discussing Italy, “Ultimately, changing the rules of the game in politics becomes a matter of political party survival and can be fiercely fought.”
According to a recent Pew survey, only 22 per cent of Italians believe integration into the eurozone has strengthened their economy, and opposition political parties are on the rise. The new Five-Star Movement, led by Italian comedian Beppe Grillo, is rising fast, and according to Fordham could “capitalise upon anti-establishment sentiment” heading into the election period.
These dynamics could prove troublesome for negotiating support from the EFSF/ESM and the ECB in the coming months.