Prime Minister Mario Monti has dragged Italy back from the brink of bankruptcy after a year in power and launched long-delayed reforms that used to be seen as political suicide, analysts agree. But his predecessor Silvio Berlusconi's decision to withdraw from frontline politics after 20 years has sparked disarray ahead of a general election early next year which could have far-reaching consequences for the eurozone.
As the recession drags on and anti-political sentiment gains force in Italy, international investors and observers are concerned that the election may lead to deeper chaos or a new government which is less reform-minded than Monti's. The former economics professor and high-flying European commissioner was installed at the head of an unelected technocratic government on November 16, 2011, to take over from Berlusconi after a wave of financial market panic.
Monti has fought a war on all fronts over the past 12 months to stop Italy from following in the wake of more troubled eurozone economies and to try to convince ordinary Italians that their economic sacrifices are worthwhile. He has also battled against the growing split between northern and southern Europe fuelled by the debt crisis and restored relative calm for Italy on the financial markets, staving off the prospect of resorting to financial aid.
Italy's borrowing costs on the bond markets have dropped sharply and the "spread" or the differential between Italian and benchmark German 10-year sovereign bond rates - a key measure of investor confidence - has eased. Under Monti's watch, Italy has almost completed ahead of time an ambitious programme for bond auctions that had seemed daunting at the start of the year.
But the calm is at risk of cracking as the election campaign gets under way, with the main centre-left coalition set to nominate its candidate later this month and the main centre-right grouping holding primaries next month. Billionaire Berlusconi's People of Freedom (PDL) party has been hit badly by fraud and corruption scandals over the past few months and riven by infighting. The once brilliant entrepreneur's withdrawal from the leadership race left his party rudderless, with members deserting ship over everything from support for Monti's austerity measures to their former leader's anti-Europe rants.
Berlusconi stepped down in November 2011 after a parliamentary revolt, a series of sex scandals and a wave of panic on the financial markets. The three-time premier was convicted of tax fraud last month and sentenced to four years in jail - later reduced to one year under an amnesty law - and banned from holding public office for five years.
"The right is completely split and the biggest centre-right party, the PDL, is reduced to 10 to 15 percent in some polls," said expert Roberto D'Alimonte. It is bad news for a party which can no longer count on support from its old coalition partner the Northern League, embroiled in its own corruption scandal. The main centre-left Democratic Party (PD) is forecast to win a maximum of 30 percent of the vote, but it would still have to form a coalition to govern.
The centre-left has scheduled a primary on November 25 to pick a candidate for April's electoral race: favourite Pier Luigi Bersani, 61, current PD head, is facing a challenge from the youthful mayor of Florence, Matteo Renzi. Whoever wins will likely have to link up with the Left, Ecology and Freedom party (SEL), led by Nichi Vendola, one of Italy's few openly gay politicians.
Renzi, 37, who hopes to oust an ageing political establishment, has been drumming up support on the back of disgust with traditional politicians - a trend that has boosted votes for the anti-establishment Five Star Movement. The movement led by ex-comedian Beppe Grillo, which has climbed to more than 20 percent in some polls, has slammed Monti for enforcing austerity and many of its voters are young Italians, who have been hit hardest by unemployment.
Italy's economy is expected to shrink by 2.3 percentage points this year and 0.5 percent next year while the jobless rate continues to hit record. Monti has promised that an economic recovery will start next year but many experts say his forecast is overly optimistic.
Adding to the concern is the possibility that the reforms could halt after the election or some of the most controversial measures even be reversed. Above all, the parties will have to try and counter apathy among voters after fewer than 50 percent turned out for a recent election in Sicily.
Italy, which tottered on the brink of the debt crisis storm last year, "cannot afford a weak government in the face of economic difficulties and international threats," said Stefano Folli of the financial daily Sole 24 Ore. The ideal solution would be a German-style coalition "bringing together the moderate left, the centre and moderate centre-right" headed by Monti, he said. Monti has not excluded the possibility of serving in a future government if he is asked to do so, though some commentators say he would be better placed to take over as the country's president, remaining close to hand but not in power.
Whatever happens, "Italy needs to continue showing a firm commitment to its final aim of cutting its public debt," said Giada Giani, analyst at Citibank. Her concern that "market participants may soon start questioning again Italy's commitment" were echoed by Matteo Cominetta, an economist at UBS bank. "Italy still draws too much market attention to enjoy the luxury of not having a government for months," he said.
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