Can Southern Europe Keep The Show On The Road?

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Three of the most important crisis hit countries in Southern Europe – Italy, Greece and Portugal – have been seeking to make progress under coalition Governments, representing a delicate balance of domestic political forces. In some ways they have been surprisingly successful; the pressure to avoid a more generalised crisis of confidence has pushed traditional opponents to cooperate in the interests of self-preservation. Recent events, as JPMorgan notes, have highlighted some of the existing fragilities however, and serve as a useful reminder that stability is far from guaranteed. In addition, the wounds inflicted by recent political battles may have a cumulative impact, weakening the commitment to cooperation in Government over the medium-term. This invites two questions; can they keep the show on the road, and for how long? The wear and tear of governing has created a series of cumulative pressures, which look a lot like the proverbial straws on the camels back. As JPMorgan concludes, at some point one of them is likely to cause a break (our instinct tells us risks are probably highest in Italy).

Via JPMorgan's Alex White,

  • Political developments in the South are making life more difficult for the region’s Governments
  • In Greece, the new Government has a slim majority, and little margin for error
  • In Italy, ongoing legal pressure on Berlusconi is making cooperation in Government more difficult
  • The cumulative impact of coalition tensions could be unmanageable in the long-term
  • Near-term however, we are unlikely to see enough pressure to trigger a Government failure

Greece: A difficult new world

Developments in Greece over the past ten days have disappointed. Prime Minister Samaras chose to take a significant political gamble this month in closing ERT, the state broadcaster. This was an opportunity to push symbolic change and could have led to more political space for reform (see our note of June 14th). The gamble didn’t pay off, Samaras has been forced to row back on most of his original policy, in addition to losing one of his coalition partners – the small left-wing party, DIMAR. The Prime Minister has just unveiled a new Cabinet comprising ND and PASOK Ministers, which will hold a slim majority (153 seats in the 300 seat parliament). In effect, this will become Greece’s fourth Government in less than 2 years.

There have been several negatives consequences to the ERT affair, as well as one significant positive. Firstly, and most obviously, the Government now has a much slimmer majority, and can potentially be held hostage by the interests of individual MPs (although it will still be able to count on DIMAR support in some cases). Secondly, the momentum for reform that could have been triggered by a more successful resolution of ERT is likely to be lost; the Government can evidently be forced into concessions on public sector payrolls if resisted robustly enough.

There are significant positives as well. It has become obvious that the main parties will take almost any step to avoid an election, particularly PASOK. The new coalition arrangement effectively makes the two governing parties deeply co-dependent. ND dominates Government but couldn’t win a new election outright, while PASOK needs the oxygen of power to survive as a political force; creating an embrace that looks hard to break. There is a chance that DIMAR’s departure will concentrate minds, and a more coherent programme could potentially result (in effect the spell has been broken, and the two parties can no longer avoid the reality that they will live or fall together). The new Government will find life hard however; Greece is now led by a simple coalition of the two main parties who have governed since 1974, lending credence to opposition critiques of the way the country is managed.

Italy: Path ahead doesn’t look any easier

An Italian court has found against Silvio Berlusconi for the third time this year, ruling that he be disbarred from public office for life as a consequence of the ‘Ruby’ affair. In effect the ruling is even less likely to be implemented than the ones which preceded it, since it has yet to be put to appeal. However, it makes life incrementally more difficult for both sides of Italy’s fissiparous coalition, by reinforcing the polarising effects of Berlusconi’s role in public life. It will provide further support to those within PD (the centre-left) who argue that coalition with Berlusconi is unacceptable. It will also increase discontent within PdL, who see these developments as a politically motivated judicial ‘campaign’ to discredit their leader. In an environment where PdL has not got much of what it wants on major policy issues, this is likely to increase the perception that it is losing ground – which will create problems for the coalition.

These events come against the backdrop of increasing concern about a Government that has yet to deliver any substantive change. The ongoing increase in political distrust makes deadlock over the IMU property tax and other issues incrementally more difficult to overcome. Berlusconi’s problems are unlikely to trigger a new election in the near-term (there would be significant risks for all sides, including PdL). However, both main parties – and individual factions within them – are continuing to weigh up the balance of threats and opportunities inherent in a new campaign (particularly in the context of the recent fade in support for Beppe Grillo’s Five Star Movement).

Portugal: Positioning ahead of September elections

The Government continues to feel the impact of the political crisis of the last few months; which was triggered by the need to fill the fiscal hole created by the Constitutional Court’s ruling against aspects of the 2013 Budget. Pension measures remain particularly contentious, with the junior coalition party CDS-PP continuing to raise objections about aspects of the Government’s programme. Additional stresses are likely to emerge as the parties position for local elections in September, which will be particularly important for CDS-PP (the party will want to position itself as the restraining force within Government, and is likely to make life increasingly difficult for the Prime Minister). As with PASOK in Greece however, senior figures within the smaller party look to have made a strategic decision that their future lies in claiming credit for the success of the Government, while blocking what they can. The danger lies in the way that this particular balance continues to be delivered over the coming months.

More straws on the camel’s back

We expect all three Governments to survive the rest of the year, with the burden of responsibility for taking any decision that leads towards a broader crisis deterring individual parties from exiting. However, the wear and tear of governing has created a series of cumulative pressures, which look a lot like the proverbial straws on the camels back. At some point one of them is likely to cause a break (our instinct tells us risks are probably highest in Italy).

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