The Italian presidential election will take place today. More than 1,000 legislators, and regional delegates will vote in the intricate secret ballot, which has been compared to the processes followed to appoint a new pope in the Catholic Church. The process could take several rounds, and the person selected will be the successor of Sergio Mattarella, who will be leaving the seat on the 3rd of February.
We have received some insights and commentaries from the professionals within the asset management industry in relation to this event, the Italian Presidential election, and its potential effects in the markets.
François Raynaud, Fund Manager Multi-Asset & Overlay at Edmond de Rothschild Asset Management
The January 24 presidential election in Italy is of particular interest to markets.
The president plays a key role in talks to form governments, especially during crises. He can veto any ministerial appointment that might run counter to the country’s constitutional commitments. This happened in 2018 when the current president Sergio Mattarella blocked the appointment of a finance minister opposed to the euro. Note that the two Eurosceptic parties, the Northern League and Fratelli d’Italia are still the favourites to form a government when the next parliamentary elections are held in 2023 at the latest.
Now Mario Draghi, the current prime minister, wants to stand for president. The problem is that if he succeeds, his replacement as prime minister could well undermine the government’s action: party disagreements would probably return to the spotlight and early elections might be triggered. Mario Draghi’s international standing would be particularly useful in talks over the EU’s budgetary rules under France’s presidency.
For the moment, there have been many calls for Draghi to remain prime minister and it is still not sure he would secure official support from one or several parties for a presidential bid.
Silvio Berlusconi’s partisan attempt is unlikely to succeed as the voting system favours candidates who get some consensus support after several rounds and not headline acts.
With the ECB planning to taper its asset purchases in 2022, a move that should logically hit Italian bond spreads against the German Bund, we think the only scenario that could stabilise spreads is to keep Mario Draghi as prime minister and elect a pro-Europe president. If Mario Draghi were to become president, speculation on the government failing would be rekindled and Italian spreads could rise to as much as 160bp. Voting is secret and there could, of course, be a few surprises. We cannot rule out Draghi failing to win his bid for president but that would leave him weakened.
BoFA Global Research team
What to expect? The outcome is uncertain due to the volatile process (secret ballots with a varying quorum) and political fragmentation. Party leaders have little control over their own members during the secret ballots, so some noise is to be expected. We see three main scenarios in the near term:
1) Our base case is a market-friendly result. We expect a compromise candidate to become president (or Mattarella himself to be re-elected for a second mandate) and Draghi to stay on as prime minister. In this scenario, the policy stance is broadly unchanged this year and the implementation of NGEU remains on track. This outcome would also maximise the likelihood of a successful debate at the European level, with Draghi sat at the negotiating table and, at the same time, NGEU implementation proceeding as smoothly as possible.
2) Draghi is elected president. The coalition government could still continue under the guidance of a new PM, but that’s far from guaranteed. Some parties are unlikely to back a government with another PM and a smaller coalition would probably be fragile. This scenario wouldn’t necessary be market unfriendly, but it would be inherently more worrying, because early elections and political instability could come into play. More importantly, we fear in this scenario a weak government would lack the strength for a smooth implementation of NGEU.
3) The risk scenario: the tactical behaviour of political parties (and of single MPs) in the secret ballots leads to the surprise election of a very divisive candidate, causing mayhem in the grand coalition. This could trigger an early election and mark a return to political instability. And political instability would interfere with both NGEU implementation and the discussion of fiscal rules.
Pietro Baffico, European Economist at abrdn
The Italian presidential election should lead to the appointment of a new head of state before February 3rd, when the 7-year mandate of the incumbent Mattarella expires. Should Prime Minister Draghi become President, or his effectiveness be weakened as a result of the election, the unity government risks fragmenting. This could lead to policy paralysis, and even early elections, which would likely see a further widening in Italian government spreads.
Positive outcomes for markets would be a compromise candidate, or a continuation of Mattarella’s Presidency. However, he has already excluded himself going for a second term. There is only one precedent of a president elected for a second term, with Napolitano being reappointed in 2013 due to a political deadlock. A Draghi Presidency could mean longer-term political stability, although in the short term would be reassuring only alongside a solid agreement on the unity government. The Presidency is often described as a ceremonial role, involving signing laws, presiding over the Judiciary and the Defence councils. However, the president gains extensive powers in time of political crisis, can dissolve the chambers, give mandates to form a government, and appoint technical cabinets. Therefore, the office is not without significance given Italy’s political volatility
Indeed, there is a risk of political divisions rising further this year, with parliamentarians likely to look ahead to the next general elections to be held by June 2023. Should the Presidential election outcome undermine the government coalition, it may become harder for the government to unlock the NextGenEU funds, which would in turn delay the much-needed investment plans. In a downside scenario, a government collapse may lead to early elections and further political paralysis. Markets will price these uncertainties, with the risk of higher government bond yields.
