Italian opposition parties weigh new governing coalition after Conte's resignation

Italy's President Sergio Mattarella talks to journalists after Italy's designated Prime Minister Giuseppe Conte returned the mandate to form a new government, on May 27, 2018 in Rome, Italy.

Alessandra Benedetti | Corbis | Getty Images

As Italian President Sergio Mattarella perseveres through a two-day consultation period with the country's divided parliamentary leaders, senior lawmakers from major opposition parties on either side of the political spectrum have indicated they would be open to joining a new governing coalition that may soon coalesce around the anti-establishment Five Star Movement (M5S).

After a meeting of its parliamentary members Tuesday morning in Rome, the centre-left Democratic Party (PD) announced it had unanimously decided to consider some cooperation with M5S, if several key budgetary and investment conditions could be be met.

And the weakened centre-right Forza Italia (FI), led by 82-year-old former prime minister Silvio Berlusconi, may face its own fresh round of internal turmoil if some members choose to leave the political wilderness as part of a new parliamentary majority that Mattarella will try to craft in the coming days.

There are few signs that the heavily strained relationship between the anti-immigrant Lega party and M5S will survive after firebrand Lega leader Matteo Salvini demanded premature snap elections earlier this month before fiercely criticising, in a Senate speech Monday, the coalition government he helped form just last May.

In the wake of Salvini's theatrical performance, the scrabble for power — or at least political relevance — has grown increasingly frenetic among his rivals and enemies.

Alessandro Alfieri, a senator in the centre-left Partito Democratico (PD), told CNBC that his party's parliamentary members had swiftly endorsed Tuesday morning a document that laid out a political strategy for the current crisis.

He acknowledged a combination with M5S was "not easy," given the big policy differences between the two political groups. "But we decided to try," he said. 

Negotiating a long-term tie-up

A copy of the declaration obtained by CNBC showed the minimum requirements for a long-term PD-M5S tie-up would include fresh national investment based on a view of economic development that differs significantly from the populists' current spendthrift model; an effort to block a potentially harmful rise in VAT that will soon be triggered without rapid legislative intervention; and a commitment to "loyal membership of the EU."

For the past 14 months, the combative coalition has frequently strained Rome's relationship with the European Commission in Brussels, as combined electoral campaign promises of reduced tax rates and increased spending collided with the reality of Italy's low growth, high borrowing costs and the stringent deficit and debt limitations that are required of Eurozone member states.

Salvini has become the antagonist-in-chief for the EU's executive branch and the continent's more centrist national leaders. He and his Lega colleagues' public critiques of the trading bloc's policies on migration and fiscal restraint have regularly prompted a widening of the spread between the yields on Italian and German sovereign bonds — a differential that many market participants view as a barometer of European investment risk.

Lega's eurosceptic views have also helped to complicate its long-standing relationship with FI, since party leader Berlusconi shared an electoral platform with Salvini during last March's national polls, despite his oft-stated views that Italy's EU membership remains integral to the country's future success.

And this week, cracks in the Forza Italia edifice have grown more visible, as the option to abandon Lega as a long-term partner for a chance to return to power becomes a very real possibility.

"The immediate preoccupation is the spread," said FI Senator Massimo Berutti, who called Salvini a "creature of the electoral campaign trail," who had been left in a "difficult corner" by his decision to collapse the existing coalition government.

"I have serious doubts, but there are those who do not want to be with Salvini who could do it," Berutti said, referring to participation in a potential PD-M5S coalition government.

Lucio Malan, FI's deputy leader in the Senate acknowledged that the party's unity was under pressure from Lega's growing domination of Italy's right-wing voters, with some members now "looking around, because we cannot allow ourselves to be eaten up by Salvini."

But since financial market reaction to the ongoing political drama had remained relatively muted so far, Malan insisted in an interview with CNBC that the current uncertainty does not yet constitute a national emergency. But he said elections this year could force FI members to reconsider their allegiance to the party Berlusconi helped found in 1994, since "a big part of us will not be reelected" based on current poll numbers.

A lawmaker close to the ageing three-time premier, former party spokesperson Deborah Bergamini, insisted none of her colleagues would seek to participate in such a government. "I exclude it," she wrote in a message to CNBC.

As for the populist M5S and its youthful party leader Luigi di Maio, himself a fierce critic of Berlusconi, the party's largest share of legislators in both the upper and lower chambers should theoretically mean they hold the strongest cards in any discussion of a new, alternative governing coalition. But some observers insist their ever-falling poll numbers create a different kind of pressure.

"We should never underestimate the sense of survival of the Italian politicians, regardless of their party or affiliation," said Wolfango Piccoli, co-president of the political risk advisory firm Teneo Intelligence. "I think it's a very important factor for the 5 Star, because they know that 50% of them will not be back if they go for an early election."

But Piccoli cautioned that a new PD-M5S government would still have only the slimmest of potential majorities in both legislative chambers, thanks to the complex parliamentary arithmetic that has threatened deadlock ever since last March's polls. And that might mean that otherwise tiny political movements, with just one or two representatives, would gladly become the new kingmakers.

As Mattarella's marathon run of meetings with those smaller parties began early Tuesday afternoon, Salvini insisted there was only one key needed to unlock the impasse, and he would repeat it in his own forthcoming conversation with the venerable head of state: "elections." Until those were held, he told CNBC in an interview outside Italy's parliament, his most pressing priorities could be summed up in two words: "tax cuts, tax cuts, tax cuts."

Mattarella has asked Conte to continue to head a caretaker government for now, but several lawmakers told CNBC that they thought it unlikely that would continue if snap elections were announced, and that instead a "kamikaze" or "doomed" prime minister and cabinet of technocrats would be asked to usher the country to the polls almost three and a half years early and perhaps as soon as October.

"Salvini could not run an election in an impartial manner," was one lawmaker's interpretation of the President's possible thinking about the incumbent minister of interior.

Matarella, who like much of the country's political class was forced to cut short his traditional August vacation to return to Rome, will spend this weekend in reflection as he explores the various exit options from his nation's latest imbroglio.

Last year he spearheaded weeks of talks between Lega and M5S to birth an uneasy coalition that seems now to have finally imploded. But lawmakers and analysts say financial markets and Italy's international obligations may not afford veteran politico Mattarella a similar degree of breathing room on this occasion.

"We think he wants to move faster than in the past," said PD Senator Alfieri. He predicted that if some of the country's parties required more time for internal debates, the president might permit further discussion. "But not much," he said. 

—CNBC producer Chanel Monteine contributed to this report. 

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