WOOD Flash – Italy: the Constitutional saga, step 2

Italian President Sergio Mattarella has nominated former foreign minister Paolo Gentiloni to lead the next government. Mr. Gentiloni will need to secure a vote of confidence in the next few days, which will likely be backed by the same coalition that former PM Renzi had (PD, Civic Choice and NDC). The incoming government will focus on adjusting the electoral laws, which implies earlier possible elections in June 2017, although slippage to the scheduled spring 2018 also remains possible, if not likely, given the escalating problems in the banking sector. Implications for the rest of Europe from this government changeover are minimal, in our view, but the results of the next election (regardless of the date) will be very important. In our view, Italy still has three-to-five years, if not more, of corporate sector restructuring ahead and labour costs compression. This is a transitory positive factor for Central Europe, which is a recipient of companies that relocate. How severe/disruptive this process will be will depend on the election result: another PD mandate would mean a slow adjustment and a relatively EU-friendly government; a 5 Stars victory would bring severe policy and foreign relations uncertainty. It will be a tight race between the Democratic Party and the 5 Star Movement, in our view, with the key things to watch related to what is most important to the voters currently: awareness of the problems, and the expertise and ability to deliver. Neither party is evidently (to most voters) superior at the moment on all three, in our view.