Even for Italy, Forming a Government Looks Tough: Scenarios

(Bloomberg) -- Italy is long used to managing political instability, but giving birth to the country's 65th government since World War II looks a particularly tough order. With Sunday's election forecast to produce a hung parliament, weeks of political uncertainty could hang over an economy burdened with a feeble recovery and a public debt mountain. Here are four possible scenarios for what might transpire:

Gridlock

No single party or coalition wins a parliamentary majority. Italy would still have a government, because Paolo Gentiloni remains premier. Back-room dealings start before parliament reconvenes on March 23. Lawmakers pick new speakers for the lower house and the Senate -- offering the first clue to new alliances.

If the search for a premier stalls, President Sergio Mattarella will be in no hurry to make the choice and could give parties several weeks to negotiate. “If the first person Mattarella picks fails to form a majority, the president can try someone else, and try again,” said Giovanni Tarli Barbieri, a professor of constitutional law at Florence University. “But you've got to be reasonable, this can't go on for two months.”

Mattarella would seek to ensure that a new government, led by a politician or a technocrat, focuses on getting the 2019 budget through parliament by the end of the year. He'd also want to see changes to the electoral system -- possibly more toward winner-takes-all -- for a new election next June.

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Center-Right Rule

Voter surveys before a polling blackout on Feb. 17 suggested the four-party, center-right coalition led by ex-premier Silvio Berlusconi was the only group with a chance of winning a majority. Berlusconi and his main ally, Matteo Salvini, leader of the euro-skeptic League, have a deal that the party with the most votes gets to flag a candidate for the premiership to Mattarella.

Berlusconi is banned from holding public office until next year because of a 2013 tax-fraud conviction, and he's said that European Parliament head Antonio Tajani would be “an excellent solution” as premier. Tajani tweeted he had told Berlusconi he was ready “to serve Italy.” Expect a fractious government, since Berlusconi and Salvini have clashed repeatedly over issues from Italy's future in the euro area to pension reform.

As far as markets are concerned, “if Berlusconi's party comes out on top, we'll have to worry about his flat tax” and a potential clash with the EU over blowing out the deficit, said Erik Jones, professor of international political economy at the Johns Hopkins University in Bologna. “If Salvini's on top, the concern will be his overhaul of pensions because that could be a problem for sustainable public finances in the long term.”

Grand Coalition

A pro-European alliance based on the center-left Democratic Party (PD), its allies and Berlusconi's Forza Italia depends on how the two main parties perform. For PD head Matteo Renzi, slipping below 20 percent of the vote, from more than 40 percent in 2014's European elections, could spark a leadership challenge and make it harder to build a grand coalition.

Asked about such an alliance, Renzi has said the PD will never govern with “extremists,” while Berlusconi says it would be difficult to salvage his previous ties with Renzi. “But after the election things change,” said Tarli Barbieri. “If the parties can agree a program for government, they'll work together.”

Such a government is “the least-worst option,” and favored by investors and the EU, said Roberto D'Alimonte, a political science professor at Rome's Luiss University. But it looks ambitious to get the “lots of extra lawmakers” both sides would need for a majority.

Populist Pact

Even if Five Star succeeds in becoming the biggest single party, its leader Luigi Di Maio will only be given a mandate if he either wins a majority of seats or can forge a government with such backing. Di Maio says he would offer other parties a “government contract” -- a deal short of a coalition -- insist on being premier, and refuse to share out ministerial jobs. But again, this stand could change after weeks of horse-trading.

Italy's biggest parties have all recently ruled out an alliance with Five Star, although the League's Salvini said in October that if the center-right didn't win a majority, he'd call Five Star co-founder Beppe Grillo. Both parties want to scrap a pension reform which raised the retirement age, overhaul EU treaties and have ditching the euro as an option.

“The populist pact is the most worrying option for investors,” said Jones.

To contact the reporter on this story: John Follain in Rome at jfollain2@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Ben Sills

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