Global Insight Perspective

Significance

Italian voters will go to the polls on 9 April, faced with a choice between sticking with the centre-right government of colourful Prime Minister Silvio Berlusconi, or re-electing former prime minister and European Commission president Romano Prodi and his centre-left coalition.

Implications

Even though the two coalitions are close together in opinion polls, Prodi is the more popular choice as premier on an individual voter level, despite the best efforts of Berlusconi to appeal to the electorate. However, the government has been quick to capitalise on the likely increase in taxation that the centre-left coalition would bring, and has asked for another five years to bring the troubled economy to heel.

Outlook

This weekend's election is in fact only the first hurdle, with the eventual victor facing a huge challenge to turn around the economy and win back the confidence of the electorate. Victory for Berlusconi, although he has suffered somewhat in recent months, cannot be ruled out, with his unique blend of flamboyant rhetoric and self-promotion still attractive to many voters.

Prime Minister Silvio Berlusconi could see his empire begin to crumble around him next week if the opposition centre-left coalition achieves victory in the 9 April parliamentary elections, which would bring an end to his controversial leadership.

The battle for power is being waged between the incumbent, centre-right House of Liberty coalition and the opposition, centre-left Union bloc. The former is led by Prime Minister Silvio Berlusconi and made up of his Forza Italia (FI), the National Alliance (AN), the Northern League (LN) and the Union of Democratic Christians and the Centre (UDC); the latter is led by former prime minister and European Commission president Romano Prodi, and includes the Margherita party, the Democrats of the Left (DS) and the Green Party. The centre-left 'Union' is generally a more disparate coalition than the House of Liberty, and there are concerns that while Prodi could deliver a victory this weekend, he may not be able to retain control over the coalition members for a full term. The House of Liberty line-up consists of 15 parties in the Chamber of Deputies (lower house of parliament) ballot, and 17 in the Senate (upper house) campaign. The Union coalition is meanwhile made up of 17 and 16 parties, respectively. Little, though, has been heard of party policies during the campaign, with the clash between the two main personalities the dominant feature, which has also served to distract attention from the ignominious departures of ministers and central bank governor Antionio Fazio.

Both coalitions are aiming to win power, but the victors will be faced with an economy in desperate need of rehabilitation. The days before the election have been dominated by data releases showing almost flat GDP growth of 0.1% in 2005, and a downward revision to the government's 2006 growth forecast from 1.5% to 1.3%. Finance Minister Guilio Tremonti has admitted that the budget deficit is likely to hit 3.8% of GDP this year, higher than the original forecast of 3.5%, but this did not prevent Berlusconi from pledging at the close of a live television debate on 4 April to end real-estate tax on first purchases, at a cost of 3.2 billion euro. Few will have been surprised by the revised data, but there has been a great deal of vagueness over how the proposed policies to boost growth, cut unemployment and increase tax morality will be financed. Berlusconi has often resorted to citing the sizeable informal economy in his attempts to argue that the overall economy is healthy. However, studies have already concluded that Prodi's platform is more likely to yield results. In the absence of strong economic arguments, how then has the government been conducting its campaign?

Campaign Tactics

The most obvious tactic of the ruling coalition has been to play on the fears of the electorate; fears over jobs, money, traditional family values and terrorism. Yesterday Interior Minister Guiseppe Pisanu claimed that the government had foiled a terrorist plot to attack a church in Bologna and a subway station in Milan designed to disrupt the elections, blaming Islamic militants and saying that arrests had been made. The government has hinted that the centre-left's position on immigration would open the floodgates to illegal entrants, and data regarding the recent applications process for work permits indicated much higher numbers of illegal immigrants already present. Prodi has been enticed into the debate on family values, this week urging Catholic voters to back the centre-left and ensure that same-sex marriages are not approved - something that could put off some liberal voters. The Church and religion, though, have played a much smaller role in the election campaign than previously.

The electorate is also concerned with day-to-day issues such as employment and the cost of living, and the youth vote has been largely ignored in favour of the growing number of the older members of the population. Berlusconi has promised one million new jobs (with no further details), increased pensions and other boons for pensioners, plus tax breaks for students and the scrapping of real-estate tax, increasingly adding to the initial pithy 10-point plan presented by the government (see Italy: 27 February 2006: Election 2006: Italian PM Draws Attention Away from Manifesto with Attacks on Judiciary, Media). The opposition manifesto was a weightier 281-page document, leading with a promised 5% reduction in payroll taxes to boost tax morality and a cut in tax on reinvested corporate profits; however, other policies would probably mean a higher tax burden overall - including a planned harmonisation of capital gains tax that would raise levies on government bonds and other savings held by vast swathes of the population. The Union has stopped short of making pronouncements on the deficit situation, promising a post-election audit as its first step.

Attention Seeking

The election campaign has been highly personal and dominated by Berlusconi, with concern having grown over his influence over the media. The Berlusconi family-controlled Mediaset has been fined on more than one occasion in 2006 alone for flouting rules regarding its election coverage (see for example Italy: 10 February 2006: PM's Media Company Fined over His Excessive Airtime), and the prime minister was forced earlier this week to pull out of a last-minute television appearance on the network as it would have breached coverage rules, the existence of which Berlusconi has complained about. Even the president of the state network RAI has raised concerns over unbalanced coverage, which has been boosted by the copy Berlusconi provides. Some of Berlusconi's recent comments have swung from the outlandish to the insulting; he recently claimed that the Chinese under Mao Zedong boiled babies to create fertiliser, and he has thrown numerous insults at the opposition, its supporters, and also the business world, which has criticised the country's economic management (see Italy: 10 March 2006: Election 2006: Spying Probe, Bribery Investigation Embroil Italian Government, Yet Opposition Poll Lead Falls). However, during two live television debates with Prodi, Berlusconi under-performed.

This dominance of the personality clash has failed to sway the undecided 25% of voters and has resulted in several important issues being ignored during the campaign, despite the pressing concerns over the economic situation.

If in Doubt, Change the System

One of the biggest issues of the election race has been the revamp of the electoral system, and the potential consequences of this (see Italy: 14 October 2005: Italy to Reshape Electoral System After Parliament Approves Disputed Reform Bill). It is widely believed that the change will benefit the incumbent coalition. Ditching the 75% majoritarian/25% proportional representation (PR) system that played an important part in allowing Berlusconi's House of Liberty coalition to remain in government for a full term, the reforms mean that all seats will now be allocated by PR, but under different rules for the upper and lower houses of parliament. There will also be a winner's bonus to ensure that the coalition with the largest share of the vote is allocated 340 seats in the 630-seat Chamber of Deputies - a comfortable majority - if its vote share does not meet the 55% threshold required. Parties require 2% of the vote in order to gain parliamentary representation (3% for the Senate). Because the emphasis is on coalition-building, both sides have been trying to form alliances with small but potentially decisive parties, including those on the far-right by Berlusconi; Prodi achieved something of a coup by securing an endorsement from the Pensioner's Party (see Italy: 24 February 2006: Election 2006: Italian PM Woos 'Grey' Vote with Offer of Free Travel and Entertainment and Italy: 20 February 2006: Election 2006: Italian PM's Party Signs Deal with Far-Right). The situation regarding the upper house is more complex, as the distribution of seats will be regionally determined. Should one side gain control of the Chamber of Deputies, and the other the Senate, there will be a strong chance of early elections, since the two are unlikely to be able to co-operate formally in government, which would create a legislative deadlock. The chance of this occurring is small if the centre-left can swing the vote; the voting age for the Senate elections is 25 and above, favouring the leftist parties as it removes the largely right-wing youth vote. This is assuming that voters can negotiate a large and confusing ballot paper.

Berlusconi even raised concerns yesterday over the possibility of vote-rigging, calling for international observers to be brought in to oversee voting, and accusing the opposition 'gentlemen' of being experts in fraud - one last swing at his opponents.

Outlook and Implications

While it is easy to ridicule the prime minister, he certainly should not be under-estimated. It is hard to believe that his apparently haphazard campaign has not been planned with precision in light of his own admissions that there is too much at stake. Political immunity has certainly shielded him from the law over some allegedly shady business dealings, but a case into allegations that he bribed David Mills, the lawyer husband of U.K. Culture Secretary Tessa Jowell, is progressing. Expiring statutes of limitations have aided him in some of the dozen or so cases that have been brought against him.

The tide has been turning against the prime minister, but while there are voices of dissension within his four-party coalition, and he cannot rely on unwavering support from the far-right parties he has courted, most acknowledge that he comes across as the true leader at present. Prodi cannot command the same level of support, despite being the overwhelming choice to lead the centre-left. Whether he can change this if he attains power is debatable; he has been a moderate challenger in the campaign in contrast to Berlusconi, and has a more receptive audience within European structures. His foreign policy is far less Atlanticist than that of Berlusconi.

Polls before the election moratorium showed a slight advantage for the opposition, but not of a magnitude sufficient to confidently predict the outcome. Berlusconi's appeal is strong, but even if he emerges victorious he cannot count on a full term in power - something he has this week admitted, promising early elections should there be an attempt to force him out of power. Whoever wins will have to take swift economic action and, as noted, Prodi's plans in this respect have a slight edge over Berlusconi's, although they may not be enough to restore the economy to its potential strength; this partly requires a much longer-term cultural change and an end to the informal economy, which can only be achieved with better conditions for those within it. Growth continued to disappoint in 2005. Global Insight is slightly more upbeat about 2006, with real GDP now forecast to grow by 1% this year. This increased optimism reflects the improved outlook for the Eurozone economy, coupled with a softer euro, but the poor underlying state of the economy will present difficulties for whoever inherits control of it.

Contact: Raul Dary

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raul.dary@globalinsight.com

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