Italy’s senate will convene Tuesday to set a timetable for a vote of no confidence in its coalition government.

Parliamentary group leaders met in the senate on Monday but failed to agree on when to debate the motion, prompting the full senate to be recalled from its summer break.

Matteo Salvini, deputy prime minister and leader of the anti-immigration Lega party, called for the vote and a new general election last week after declaring his party’s coalition with the anti-establishment Five Star Movement (M5S) unworkable.

The coalition, overseen by non-affiliated law professor Guiseppe Conte, who was appointed by both parties to serve as the country’s prime minister, has been on unsteady ground since it first came to power in June 2018.

On Monday, M5S leader Luigi di Maio said Italians would make Lega pay for the “stab in the back” against Italy, and ruled out a deal with former prime minister Matteo Renzi’s opposition Democratic Party (PD).

The senate will meet at 6 p.m. local time in Rome to set the initial timeline and next steps for the no-confidence motion in Conte.

Chaotic timing

Di Maio has called Salvini’s triggering of a government crisis “foolish and dangerous” while Renzi told an Italian news outlet that an election when the government is due to begin preparations for the 2020 budget would be “crazy.” Conte has also voiced staunch opposition to the move.

Salvini’s push for snap elections comes at an opportunistic time for his party, with Lega currently polling ahead of all other Italian parties despite coming to power as the junior coalition partner. M5S has fallen in popularity to poll third, according to recent data.

However, he will need support from other parties in the no-confidence motion and beyond, which does not seem to be forthcoming. Lega controls a relatively small number of seats in parliament and faces mounting resistance to the push for snap elections.

Brunello Rosa, CEO and head of research at Rosa & Roubini Associates, told CNBC Monday that Salvini’s acceleration of the crisis is a bid to scupper a vote on constitutional reform, which would see the number of MPs and senators in Italy cut by 345, and is intended by M5S and the PD to be passed before new elections.

“The fourth reading of this legislation was scheduled to take place on September 9, and if that had happened, then you would need to allow at least three months for a confirmative referendum to take place, and then a few more months to reform the electoral law and redesign the constituencies,” Rosa told CNBC’s “Squawk Box Europe.”

“So effectively as of September 9, you would have to count at least nine months or more before being able to go to elections — way too much time for Salvini to wait, and so he had to accelerate the crisis.”

Caretaker coalition

Renzi has instead called for a caretaker government to be installed with cross-party support in order to steward the country through its 2020 budget. Italy has long endured friction with the EU over its fiscal position.

His surprise offer to form an “institutional government” with M5S has deepened existential divides within both parties. While Di Maio has made his staunch opposition to Renzi known, other senior party officials have appeared willing to consider such an option to avert the possibility of snap polls this year.

“Leaving aside the deep mutual mistrust that exists between Renzi and the M5S, the parliamentary arithmetic means that it could become a realistic option only if all the M5S and PD lawmakers support this teaming up between the two parties,” Wolfango Piccoli, co-president of global CEO advisory firm Teneo, said in a note Tuesday.

Additional support from smaller parties or individual lawmakers would still be needed to establish majority control of the senate, but the formation of an anti-Salvini coalition, which would have to navigate a tough budgetary situation almost immediately, may provide a popularity boost to Lega, Piccoli suggested.

Prime Minister Giuseppe Conte during his communications in Rome ahead of a European Summit.

Mondadori Portfolio | Mondadori Portfolio | Getty Images

Salvini, who has accused his opponents of scheming to keep him out of power, is expected to withdraw the Lega ministers from the cabinet in order to place further pressure on Conte to resign hastily. However, Conte could still attempt to cling on and bring the crisis to parliament. The senate meeting Tuesday will set out the initial timeline and next steps for the process.

“All in all, the likelihood of a new government that could take Italy to elections in the spring of 2020 (or later, especially if the reform to cut the number of lawmakers is passed) rather than this fall is low (30%),” Piccoli added.

The break up between the coalition parties only becomes official with a formal act — such as a no-confidence motion in parliament, a prime ministerial resignation or the withdrawal of ministers from the Cabinet.

After that, Italian President Sergio Mattarella needs to decide whether an election takes place immediately or if he appoints a caretaker government to pass the 2020 budget in the fall.

Investors flee

Italian stocks fell sharply last Thursday upon Salvini’s call for fresh elections and have seen a further sell-off since, with the FTSE MIB down 3% over the past week.

Lorenzo Codogno, founder and chief economist of LC Macro Advisors, told CNBC Friday that early elections would take at least 60 days from the moment that parliament is dissolved, meaning the timing could not be worse.

“The big question mark here is whether Italy will go to elections quickly enough to have enough time for the new government to deliver a budget by year end. This is the most important factor also for financial markets, which seem to be reacting negatively by now, probably more because of the messy situation than because of the actual prospect of a change in government,” Codogno added.

The country’s already beleaguered banks, including Unicredit, Ubi Banca and Banco BPM, have seen share prices fall since Salvini’s comments last Thursday. Italy’s FTSE MIB index was down a further 0.43% on Tuesday afternoon, having fallen over 9% over the past month.

Source: CNBC

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