Italy faces political gridlock after crucial elections watched closely by markets

ROME – Italy faced political paralysis Monday as near-complete results in crucial national elections showed no clear winner and raised the possibility of a hung parliament. The uncertainty bodes ill for the nation’s efforts to pass the tough reforms it needs to snuff out its economic crisis and prevent a new round of global financial turmoil.

The chaotic election scenes in the eurozone’s third-biggest economy quickly snaked around globe — sending the Dow Jones index plunging more than 200 points in its sharpest drop since November and causing Tokyo’s red-hot benchmark index to sink nearly 2 per cent at open.

A major factor in the murky result was the astonishing vote haul of comic-turned-political leader Beppe Grillo, whose 5 Star Movement has capitalized on a wave of voter disgust with the ruling political class.

That has coupled with the surprise return as a political force of billionaire media mogul Silvio Berlusconi, who was driven from the premiership at the end of 2011, to roil the Italian ballot. Berlusconi’s alliance was neck-and-neck with centre-left leader Pier Luigi Bersani’s coalition for both Parliament’s lower house and the Senate.

The ballot was so close that final official results were not expected until daytime Tuesday, at earliest.

The decisions Italy’s government makes over the next several months promise to have a deep impact on whether Europe can decisively stem its financial crisis. As the eurozone’s third-largest economy, its problems can rattle market confidence in the whole bloc and analysts have worried it could fall back into old spending habits.

The unfolding uncertainty raised the possibility of new elections in the coming months, the worst possible outcome for markets that are looking to Italy to stay the course with painful but necessary reform.

While Italy’s postwar history has largely been one of revolving-door governments, it has never seen a hung parliament. Experts said that’s likely to change now.

“This has never happened before,” said James Walston, a political science professor at American University of Rome. He predicted such a swirl of political chaos that new elections may need to be called as soon as the new legislature chooses the nation’s next president this spring.

The Italian election has been one of the most fluid in the last two decades thanks to the emergence of Grillo’s 5 Star Movement, which has throbbed with anger at politics as usual. The movement came against a backdrop of harsh austerity measures imposed by technocrat Premier Mario Monti — who has fared miserably in the elections.

While Grillo trailed the alliances of the two biggest mainstream forces, his movement looked set to become the biggest single party in Parliament’s lower house — a stunning result for a protest campaign that is just over three years old.

Many eligible voters didn’t cast ballots, and a low turnout is generally seen as penalizing established parties. The turnout, at under 75 per cent — in a nation where it has historically been above 80 per cent — was the lowest in national elections since the republic was formed after World War II.

Disgust with traditional party politics likely turned off voters, although snow and rain — this was Italy’s first winter time national vote — also could be a factor.

The decisions Italy’s government makes over the next several months promise to have a deep impact on whether Europe can decisively stem its financial crisis. As the eurozone’s third-largest economy, its problems can rattle market confidence in the whole bloc and analysts have worried it could fall back into old spending habits.

Bersani, a former communist, has reform credentials as the architect of a series of liberalization measures and has shown a willingness to join with Monti, if necessary. But he could be hamstrung by the more left-wing of his party.

His party would have to win both houses to form a stable government, and given the uncertainty of possible alliances, a clear picture of prospects for a new Italian government could take days. It is all but impossible that Bersani would team up in a “grand coalition” with his arch-enemy Berlusconi.

Grillo’s camp also played down the prospect of co-operation with the ex-premier, who has been embroiled in sex and corruption scandals.

“Dialogue with Berlusconi? It is very difficult to imagine that Berlusconi would propose useful ideas (for the movement),” said 5 Star Movement candidate Alessandro Di Battista at Rome headquarters. “It never happened until now, but miracles happen.”

Italy’s borrowing costs have reflected the optimism that the country will stick to its reform plans.

The interest rate on Italy’s 10-year bonds, an indicator of investor confidence in a country’s ability to manage its debt, fell to 4.19 per cent in afternoon trading Monday. Last summer, at the height of concern over Italy’s economy, that interest rate was hovering at about 6.36 per cent.

Milan’s stock exchange closed slightly higher, with the benchmark FTSE MIB up 0.73 per cent to 16,351 points.

With 99.7 per cent of the lower house vote counted, the Bersani camp had had 29.55 per cent of the vote, to Berlusconi’s 29.17 per cent. Grillo had 25.54 and Monti’s alliance 10.56.

In the Senate, near complete Interior Ministry figures showed Bersani and his allies had nearly 32 per cent while Berlusconi and his coalition partners were pulling nearly 31 per cent. Grillo had more than 23 per cent. The overseas Senate ballot was to be added to the total later Tuesday.

More important than the overall national numbers, however, was the state-of-play in large swing regions — and Berlusconi was projected to win those.

Italy’s complex electoral law calls for the Senate seats to be divvied up according to how candidates fare region by region, and Berlusconi appeared to be winning big in Lombardy, and also ahead in the closely watched regions of Sicily and Campania, around Naples.

A Berlusconi triumph in those key regions would likely hand him control of the upper chamber, which in Italy’s legislative system is as powerful as the lower house.

When Berlusconi was forced out of office in November 2011, he was widely assumed to have joined the political dead. At 76, blamed for mismanaging the economy and disgraced by criminal allegations of sex with an underage prostitute, a comeback seemed impossible.

But one thing has become axiomatic about Berlusconi in his 20 years at the centre of Italian politics: Never count him out.

This time around, in an age of wrenching austerity, he had a very simple campaign strategy: throw around the cash.

Berlusconi has promised to give back an unpopular property tax imposed by Monti — with money from his own deep pockets, if need be.

Even his purchase of star striker Mario Balotelli for his AC Milan soccer team was widely seen as a ploy to buy votes. Berlusconi has also appealed to Italy’s right-wing by praising Italy’s former fascist dictator Benito Mussolini during a ceremony commemorating Holocaust victims.

“He played a very able game,” said Walston. “Considering that he didn’t fulfil his previous promises, it’s extraordinary.”

With near complete results, Bersani had a tiny edge in the lower chamber, where electoral law enables the biggest vote-getter there to end up with a bonus of more than 50 per cent of the seats.

Monti’s centrist coalition was having a terrible election, with his alliance getting roughly 10 per cent. Although respected abroad for his measures that helped stave off Italy’s debt crisis, the economist has widely been blamed for financial suffering caused by austerity cuts.

Analysts saw two big stories in Italy’s election.

“The first is the big surprising increase scored by the 5 Star Movement, and the other is the disappointing result” of Monti’s coalition, said Massimo Franco, a columnist with Corriere della Sera.

Berlusconi, who was forced from office in November 2011 by the debt crisis, has sought to close the gap by promising to reimburse an unpopular tax — a tactic that brought him within a hair’s breadth of winning the 2006 election. The billionaire media mogul only a few days ago told voters if need be, he’d reimburse the tax to them by shelling out from his own pocket to the tune of several billion euros (dollars).

Grillo’s forces are the greatest unknown. His protest movement against the entrenched political class has gained in strength following a series of corporate scandals that only seemed to confirm the worst about Italy’s establishment. If his self-styled political “tsunami” sweeps into Parliament with a big chunk of seats, Italy could be in store for a prolonged period of political confusion that would spook the markets. He himself won’t hold any office, due to a manslaughter conviction.

“Italy has developed a two-bloc system. We now have a three bloc system!” Walston said, referring to Grillo’s shock success.

“That might work in a country like Austria, or like Germany” where there aren’t such marked differences between coalitions. But in Italy, he said, “the personal, policy and ideological differences are too big.”

Most analysts believe Bersani would seek an alliance with centre-right Monti to secure a stable government, assuming parties gathered under Monti’s centrist banner gain enough votes.

While left-leaning Bersani has found much in common with Monti, a large part of his party’s base is considerably further to the left and could rebel.

A key Monti ally called the result “totally negative” and had an even gloomier assessment for his nation.

“As far as Italy goes,” said Gianfranco Fini, “I fear the worst is yet to come.”


Barry reported from Milan.