Italy Establishment Has Upper Hand Again After Salvini Loss

The Democratic Party, the main establishment force in Italy’s government, roared back to life on Sunday with a convincing victory in a key regional vote that shut down talk of a snap election. Italian bonds surged.

In retaining control over the center-left stronghold of Emilia-Romagna, the Democrats signaled a power shift in Prime Minister Giuseppe Conte’s coalition, rejuvenating a four-month-old government that’s struggled under the weight of populist demands from its partner, the Five Star Movement.

The center-left bloc led by Democratic Party candidate Stefano Bonaccini won the regional election with 51.4% of votes, according to final results published on the website of Italy’s Interior Ministry. Lucia Borgonzoni from the center-right grouping led by Matteo Salvini’s League got 43.6%.

Just two years after losing power and seeing their party reduced to near-irrelevance, the Democrats are now turning things around — at least partly at Five Star’s expense. The anti-establishment Five Star’s main candidate polled just 3.5% in Emilia-Romagna.

Though nominally the senior partner based on number of seats in parliament, Five Star risks losing its influence in the coalition.

“The choice is now between two main contenders,” the Democrats’ leader, Nicola Zingaretti, told reporters, referring to his party and the League. “Five Star will find itself facing this dilemma.”

Five Star is also setting up for a leadership battle following the resignation of Foreign Minister Luigi Di Maio as party leader. More than 20 lawmakers have abandoned Five Star or been expelled from the party since Conte’s second government took office in September.

Italy’s benchmark yield fell the most since August, as markets signaled relief over reduced prospects of early elections. Ten-year yields dropped 19.5 basis points to 1.04%, on the fading risk of a new government led by the League, whose euroskeptic lawmakers regularly make comments that rile markets.

“The most feared event didn’t materialize,” Paolo Pizzoli, senior economist at ING in Milan, said in an interview. “The risk of a political crisis in the short term has been eliminated for now. There’s an increased perception of government stability and a reduced risk of anti-Europe rhetoric resurfacing.”

For the markets, the defeat for Salvini coupled with the poor showing by Five Star appears to be a win/win, with the anti-establishment movement no longer in position to call the shots in government and agitate for policies that are unpopular with investors.

“Part of the yield reduction could be due to the poor showing from Five Star,” Pizzoli said. “It could reduce the level of conflicts within the government. Some requests from Five Star could be scaled back and a strengthened Democratic Party could impose its own agenda.”

The Five Star collapse in Emilia-Romagna may, for example, give the insurgent movement less clout in a tussle over whether to strip the country’s main toll-road operator, Atlantia SpA’s Autostrade per l’Italia, of its licenses after a deadly bridge disaster.

“It’s right to use this result to change the political axis of the government,” Andrea Orlando, the Democrats’ deputy secretary, told Radio Capital. “Five Star should give up on demands which make things difficult for the government.”

The Democrats’ post-election posturing suggests they’ll want the final say on a new program Conte plans to draw up in the aftermath of the weekend vote.

Conte’s Agenda 2023, the program he hopes will see the government through to the end of the parliamentary term, will likely include tax cuts, a boost for private and state investment and a faster judicial system.

After bringing down Conte’s first coalition over the summer in a doomed bid to spark new elections, Salvini has now failed twice to push Italy to a snap vote. Speaking to reporters in Bologna, Emilia-Romagna’s capital, Salvini said “only God knows” when the next general elections will be.

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