x Abu Dhabi, UAEWednesday 26 July 2017

Italy's spoilers on the ballot sheet

If Italian voters make the wrong call, it may put back into question the future of its economy and the survival of the euro.

Italian voters have the unenviable task of choosing among two populist clowns, a politically challenged academic and the leader of an unpredictable coalition of the left. If Italy gets this wrong, it may put back into question the future of its economy and the survival of the euro, sapping what life remains in the global economy.

None of the choices are good, but some are terrible: the former stand-up comedian Beppe Grillo and the three-time prime minister Silvio Berlusconi, both of whom were surging in opinion polls two weeks ago.

The attraction of Mr Grillo and his Five Star movement is evident. He is the anti-establishment, anti-euro and anti-politics candidate at a time when Italians have plenty to be angry about. He is a great campaigner, eschewing television (Mr Berlusconi owns most of the private channels) and relying on the internet and a roadshow.

In his way, Mr Grillo is a visionary, but he says Five Star won't join any coalition government and he won't serve in parliament. Instead, he promises to oppose and obstruct, and says his goal is to have enough legislators in parliament to topple the next government. If Mr Grillo can suck enough votes away from other parties today and tomorrow, then he could make the formation of a stable government impossible from the outset, forcing new elections.

This would be a replay of the damage wrought by the upstart Syriza party in the first of Greece's repeat elections last year. Think of the lost time and the instability that resulted, and then multiply that mayhem by eight to reflect the size of Italy's economy.

Italy's average growth rate in the six years before the 2009 global recession was half that of its euro-zone partners, because it had become uncompetitive.

GDP has fallen almost 8 per cent since 2008 and is still contracting. A business tycoon, Mr Berlusconi promised repeatedly to bring that acumen to bear in delivering free-market reforms and clean courts. Over three terms in office and a decade in power, he not only failed to deliver, he did harm. Mr Berlusconi became poison to Italy's brand in Europe and in bond markets, which control the country's economic fate because it has to service a debt that amounts to 127 per cent of output.

He resigned in 2011, after the country's bond yields hit an unsustainable level, above 7 per cent (they are now about 4.4 per cent).

Some of this yield premium would return if Mr Berlusconi came back to power.

That's improbable, but like Mr Grillo, he can still be a spoiler in opposition. In 2006, Berlusconi's last-minute promise of a tax windfall to voters gave him a surge in the polls that left Romano Prodi's leftist coalition with such a narrow majority that its government eventually collapsed. This year, Berlusconi's party is enjoying a boost from his recent promise of an amnesty for tax evaders and a letter he sent to every household in the country's swing regions, promising to refund US$5 billion (Dh18.36bn) worth of a property tax that his successor Mario Monti introduced to balance the budget.

What Italy needs is credible government and more reform. A recent IMF study argued that if Italy were to bring its labour and product market regulations more in line with euro-zone best practices, it could raise real GDP by 5.75 per cent in five years and eventually by 10 per cent.

More reform and competition would add still more growth. Don't look for that from Mr Grillo and Mr Berlusconi.

That leaves Italians with some combination of the least bad choices. Most Italians don't much like Mr Monti. And many don't trust the left coalition led by Pier Luigi Bersani, with its large communist rump and close ties to labour unions that are determined to keep the protections and rigidities that serve their members, but keep the young unemployed.

Still, Mr Bersani and Mr Monti both seek to actually govern and have indicated they understand what needs to be done.

Mr Grillo and Mr Berlusconi, by contrast, offer only instability. If their support grows through the polling days, the result won't be funny.

* Bloomberg View