Italy Elections 2013: What Now? Grillo, Berlusconi Upset Could Spell Chaos

In the Chamber of Deputies, the Italian lower house, the center-left Italy Common Good coalition led by Pier Luigi Bersani has -- thanks to a guaranteed majority for the coalition winning a plurality of the vote -- a comfortable 340 seats, an ample margin over the 316 seats needed to form a majority. But because of an intricate electoral law enacted in 2005, no party in the Senate has a clear majority, leaving the country -- where laws need to be approved by both Chamber and Senate -- most likely without a government to take over from outgoing Prime Minister Mario Monti.    

Former Prime Minister Silvio Berlusconi’s center-right coalition managed to pull a small miracle out of their hats on Monday, winning 29.1 percent of the popular vote and 124 seats in the House -- despite being led by a man on trial for allegedly patronizing an underage prostitute. Berlusconi's People of Freedom coalition also went within a hair of coming out ahead in the Senate, winning 117 seats to Common Good's 120. A party, or a coalition, needs 158 seats in the Senate to declare a clear majority and to govern.

The bigger story now is the rise of Grillo, whose anti-euro movement came from nowhere to win a stunning 25.5 percent of the popular vote and became Italy's biggest single political party -- despite not really being a party, a label which Grillo rejects, and not having a candidate running for prime minister. A centrist alliance led by the current prime minister, Mario Monti, won just 10.5 percent.

What comes next is anyone’s guess, a fact that the markets clearly do not like. Italian bond yields are already showing signs of upward mobility, indicating investor uncertainty, and the Italian stock market opened severely down on Tuesday morning.

“The markets have reacted nervously to the ‘messy election outcome,’” wrote Raj Badiani, an economist with IHS Global Insight in London. Badiani noted that as of Tuesday morning, the spread between the Italian 10-year Treasury bonds and the benchmark 10-year German bond had widened to 346 basis points, gaining 32 basis points in the past day, according to Bloomberg.

“A lack of political clarity on the eagerly awaited rebooting of the structural reform agenda, alongside still woeful economic data, is potentially a toxic mix,” Badiani said in an email. “With the election results suggesting Italian voters are not prepared to accept any new austerity measures, Italy will shy away from handing over its fiscal sovereignty to EU/IMF inspectors. … Although Italian voters appear to support membership of the euro, they are not prepared to accept the constant pain that is required to secure Italy's position as a dynamic, competitive and lean member of the single currency region.”

The Italian economy is likely to continue to spiral downward until the government sorts itself out, which, in typical Italian fashion, could take weeks. Al-Jazeera reported that President Giorgio Napolitano would ask Bersani, as the leader of the coalition that won a plurality, to form a government. Early reports from Reuters said Berlusconi might reach out to Bersani to build a "grand coalition" in the national interest. 

Douglas Elliott, a former investment banker and current fellow at the Brookings Institute, pointed out on Tuesday morning that a Bersani-Berlusconi coalition, while unstable at best, is the most likely scenario.

“For Berlusconi, it would be the opportunity to be back as part of the government, representing a triumphant resurgence for a man who was written off as dead politically,” Elliott wrote. Berlusconi is facing four different prosecutions currently. “For the Democratic Party, it would let them stave off dangerous new elections and ensure that their leader, Bersani, would be prime minister. Their hope would be that surviving as a government for a year or so might allow enough time for tempers to cool among the protest voters and for the economic outlook to turn at least a little cheerier, improving their chances in any subsequent election.”

Holding new elections, while not out of the question, would be a dangerous proposition, Elliott wrote in an email. "A Bersani-Monti coalition would probably be best" for investors, he said. "A new election would raise many risks and add even more uncertainties." The only problem is that Bersani and Monti together would not have enough seats for a majority in the Senate.   

James Lindsay at the Council on Foreign Relations predicted a messy outcome two weeks ago in a conversation with Robert McMahon, editor of CFR.org. “They’re going to have trouble putting a coalition back together. That’s the issue that you run into in all parliamentary systems when you don’t have a clear majority winner,” Lindsay said.

James Walston, a professor of political science at the American University of Rome, wrote that it's unlikely any coalitions will last. "The country which most needs stability will not have a government that lasts for more than a few months," he wrote. "Ethically, politically, ideologically and personally there is no way that a lasting coalition can be formed, so new elections seem inevitable."

But the cherry on top may be the upcoming presidential election. Napolitano’s term is up in two months, and one of the first duties of the new parliament will be to elect a new president. The president is supposed to be an impartial rule-enforcer, usually chosen among moderate figures who enjoy broad support. The process for electing him (or her, but there has yet to be a female Italian president) is complex, and there are no favorites or names being put forward for now. This will be the first test of whether this parliament can agree on anything, after the Italian electorate sent a clear message that they themselves are a divided country.