By Stefan Borghi, Research Analyst
On April 27, two months after initial elections, Italy finally formed a new government, ending a long political stalemate that threatened to deepen the country’s financial woes. The new government is a coalition formed by new Prime Minister Enrico Letta, which unites Letta’s center-left Democratic Party with Silvio Berlusconi’s center-right People of Liberty party. Letta was tapped by Italian President Giorgio Napolitano to form a new government after former Democratic Party leader Pier Luigi Bersani, the favorite to win the elections in February, resigned after failing to form a government with the Five Star Movement. While Letta’s government offers Italy some stability in the short-term, there are still many question marks surrounding the coalition, especially for investors.
Letta’s choice of forming a coalition with the party of Berlusconi seems like a practical one; Shares across Europe have already risen on the news of Italy’s newfound political stability. Yet it remains to be seen how long this government will last. Italy’s left is notoriously unstable and the electoral laws of the country only serve to exacerbate that instability. It seems highly unlikely that this current government will last for its entire five-year term. The challenge for Letta will be to fit in as many reforms as possible in the months, years, or possibly even weeks he may have before his government suffers the same fate of so many governments before it in Italy. No matter how many reforms, if any, the new government is able to pass, it seems unlikely that this coalition will do much to bring about the changes Italian citizens and investors alike have been calling for.
Former Prime Minister Mario Monti was a favorite amongst international investors thanks to his “Save Italy” plan to change the country’s corporate culture that allowed for cross-shareholdings and the political and corporate elite to influence the operations of Italy’s most important companies. This political and corporate elite, to which Berlusconi belongs, and which has essentially ruled Italy for decades, may have seen its influence diminish under a Monti or even a Bersani-led government. Whereas Bersani and Monti promised change in the lead-up to February’s elections, Letta’s government offers little to none thanks to his decision to ally himself with Berlusconi’s party. This does not bode well for investors who were hoping to see some significant changes after the elections.
Although he is not in a true position of leadership, Berlusconi retains leverage to influence the government, thereby protecting his interests, as well as those of the rest of Italy’s political and corporate elite. Angelino Alfano, secretary of Berlusconi’s party, will be deputy prime minister and minister of the interior. Letta himself is the nephew of Berlusconi’s top aide. Under Letta things seem poised to stay the same, which will further disillusion Italians and investor class who are already cynical about Italy’s political prospects.