The gloomy saga of Renzi’s Democratic Party (PD) is slowly but inexorably ending in a split. While it is not easy to resist the temptation to shrug this off is as yet another pathetic episode of the long history of the party’s obsessive masochism, the possible economic consequences of the “schism” should not be underestimated.
In a previous post I discussed the likelihood of Italy falling back into chaotic political instability, capital flights, rising bond spreads and bank runs (TROIKA scenario). I argued that much would depend how the (then) new Gentiloni government would manage the hot potato of the new electoral rules: this will largely determine the political landscape of the future. A “no agreement” scenario would be associated with the actual (largely proportional) electoral rules; a majoritarian system attributing extra weight to the first party would favor Beppe Grillo’s 5Star movements, and it’s unrealistic economic policies; a majoritarian system attributing extra weight to the first coalition would favor the Democratic Party and its allies; a proportional system would throw the country back to political instability.
If anything, the PD break-up makes the “no agreement” scenario more likely (from 0.5 to 0.7 probability in my assessment) . Similarly, it becomes more likely that a proportional system will be chosen, given that a weaker PD becomes more easily blackmailed by its smaller allied parties (from 0.5 to 0.6 probability).
The result is that the probability of a TROIKA scenario increases, in my calculations, from 55% to 63%. This is an optimistic estimate for the crisis scenario, as it does not take into consideration the (negative) implications of external events, such as a (possible) resignation of Juncker and the following political turmoil in Europe, a less “flexible” approach to EU fiscal deficits, an “excessive deficit” procedure of the European Commission generating loss of confidence on the Italian debt, political developments in France and the US (but that is another story..)