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There has been a significant shakeup in the political scene in Italy over the weekend. Italian president Giorgio Napolitano was reelected for another 7 year term after already heading out. In addition, the leader of the center-left PD party Pier-Luigi Bersani resigned after losing support within his party.

These significant changes leave Italy with two options: fresh elections or a grand-coalition government. The outcome will certainly impact the value of the single currency.

Napolitano, aged 87, was already on his way to retirement. However, the political deadlock that Italy encounters since the elections in February, resulted in no agreement on the name of the new president. 5 votes in parliament had failed before Napolitano was asked to remain in office. He is widely respected.

Under the Italian laws, an outgoing president cannot dissolve parliament and call new elections. After finally agreeing on a new/old candidate, will Italy go to the polls?

Not so fast.

The other development is within the the center-left PD party. The party didn’t stand behind its leader Bersani in recent months after the mixed election results. This was especially evident around the election of the president. Bersani eventually understood the hints and resigned.

The PD leadership will probably go to the mayor of  Florence, Matteo Renzi. Renzi is younger and more charismatic than Bersani. Could he push towards new elections? This depends a lot on the polls.

There are 3 major political forces in Italy today:

  1. PD: The center left party received wide support, but not enough to form a government. Since the elections, it lost popularity and could suffer a worse outcome. The PD would ideally rearrange itself under Renzi, and gain traction in opinion polls before heading to fresh elections.
  2. PDL: The center right party lead by Silvio Berlusconi rose in popularity since February and would gain from new elections. However, Berslusconi, which has legal issues, would prefer that the laws would be changed in his personal favor. This was a sticking point in the negotiations. So, Berlusconi could actually prefer a coalition in order to change the laws rather than elections. He has a dilemma.
  3. 5 Star Movement: The new alternative political force led by Beppe Grillo is an anti-establishment  party. After the positive outcome in the elections, the party ruled out a coalition with the old parties and wants new elections. The fear of his success could lead other parties to a coalition. Grillo suggested a referendum about Italy’s euro membership.

So, the ball seems to be in the court of the PD and the PDL:

  1. Grand coalition: This option would place the PD in power, with some power sharing with the PDL. The immunity for Berlusconi remains a sticking point. The grand coalition could continue the path of reform and austerity, and the enjoy this outcome. However, such a coalition between the parties that hate each other and come together only to stop Grillo would probably not last too long.
  2. New elections: This would be a gamble as well. If the PD goes with Grillo and agrees on elections, it would hope that Renzi would carry away the party to victory, but this is far from certain. Berlusconi could still win the elections. This is also a gamble for Berlusconi: as time passes by, his personal situation could worsen. For the euro, fresh elections would mean bigger uncertainty and more weight on the single currency.

Uncertainty remains in Italy after the shakeup, but at least the previous stalemate is broken. Will we see new elections soon or rather a grand coalition?

Further reading: Weakness in the Euro-zone.