MNI: Italy New PM To Have Little Headroom As Market Risks Rise

--Political Analysts See New Premier As 'Yes Man' With Hands Tied

by Silvia Marchetti

     ROME (MNI) - Italy's new government is expected to have limited headroom to

pursue an ambitious pro-growth program with its soon-to-be-appointed premier set

to be a "yes man" with his hands tied by competing groups, several leading

experts told MNI.

     Head of State Sergio Mattarella has summoned CET law professor Giuseppe

Conte to the Quirinale Palace at 1530GMT and is likely to appoint him prime

minister of a Lega and Star 5 Movement coalition government.

     After more than 2 months of political stalemate following an inconclusive

March election, Conte is expected to be formally handed the mandate to form a

new cabinet and pick the members of his team.

     --SPREADS WIDEN

     But as Italy appears to finally be exiting the political deadlock, market

tensions are rising as the fears of a populist government turn into reality and

the yield spread between Italian and German 10-year bonds reaching a peak of 196

bps, the highest since June 2017.

     Conte is no reassurance at all, nor is the fact that Lega and 5 Stars have

finally converged on an agreed governing agenda.

     "The real issue is: who is Conte? His background, curriculum and

credentials are blurry, he is an unknown figure. But above all, how much will he

really be able to achieve as premier, and for how much time will he actually

remain in office, are raising concerns at the moment. We are totally in the

dark," said Giovanni Orsina, School of Government director at Rome's LUISS

University.

     Conte might be doomed to be a mere "yes man" with his hands tied, argued

Orsina, crushed between two "puppeteer" parties -- Lega and 5 Stars -- that

despite having struck a last-minute alliance to govern, still face differences

and, loyal to online democracy, need to constantly vet what their supporters

think.

     "We have no idea what will happen, nor how this convergence between Lega

and 5 Stars will effectively come to life," added Orsina, noting that it is not

yet clear how key joint program points -- Lega's flat tax and the 5SM

'citizenship wage' -- will be funded without jeopardizing budgetary restraints.

     --BUDGET PROBLEMS AHEAD

     On Wednesday the European Commission, though giving the green light to

Italy's 2017 public finances, warned that an additional fiscal effort worth some

E10 billion would be needed for the current fiscal year. These are significant

resources that the populist government will be required to find in order to

avoid an Excessive Deficit Procedure from Brussels.

     Were Conte to fail in his cabinet-formation mandate and Mattarella

reconsiders the overall picture and withdraws his endorsement of a Lega-5SM

alliance, the helplessness (and hopelessness) of a potential populist majority

would remain until a fresh election is held, extending Italy's political limbo.

     This, though, could paradoxically be the better-case scenario.

     The actual rise of an impotent government is worse than a prolonged

political instability, argued Stefano Caselli, finance professor at Milan's

Bocconi University.

     --NO GOVT BETTER THAN BAD GOVT

     "It is better to have no government at all than a helpless, incapable one.

Markets get uneasy if a bad government takes over, led by a ruling majority

unable to get things done and push through reforms and fiscal targets," said

Caselli. 

     "Sometimes the absence of a cabinet, and therefore a situation of

protracted political deadlock as occurred in Germany and Belgium, may be seen by

(financial) markets as a reassuring factor of stability," he added.

     This is proven by the spike in spreads over the last few days, as a

Lega-5SM deal became concrete.

     Were Italy to go to another vote, economic stability would contribute in

lowering political instability risks, according to Filippo Taddei, professor of

international economics at Bologna's John Hopkins School of Advanced

International Studies (SAIS).

     "In upcoming months, stable economic fundamentals will prevail over

uncertain political dynamics. Politics, even bad politics, will not negatively

impact on the strong recovery in the short run. Plus, the effects of such bad

politics, no matter what government is in charge, are visible and measurable

only across time," said Taddei, a former economic adviser to the Democrat party.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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