No Party Wins Majority in Italy, Markets Dive

February 26, 2013 Updated: April 3, 2013

Official results for the Italian parliamentary election released early Feb. 26, European time, confirmed the fear of financial markets worldwide. Neither party could win a mandate to form a government. In addition, euro skeptical parties gathered more than 50 percent of the vote, sending markets in Europe and across the Atlantic into a tailspin. 

“[The] Italian election is the pivotal political event for the Eurozone this year, and has produced divided government in an outcome negative for political stability,” writes investment bank Citigroup in a note to clients.

Early polling on Feb. 25 indicated that pro-euro, center-left Per-Luigi Bersani would get the majority he needed to form a government. The race stayed tight and leads shifted a few times until official results came out. In order to form a government in Italy, the prime minister needs a majority in both houses of Parliament, the Chamber of Deputies and the Senate. 

Bersani finally took the lower house gathering a relative majority of 29.5 percent, according to official results. Because of a peculiarity in the Italian election law, the party that has most votes will get an absolute majority of the 630 seats. This holds even if one party wins less than 50 percent of the votes. 

Former Prime Minister Berlusconi, campaigning for the center-right and on a euroskeptic platform came very close, scaring markets. He took 29.2 percent of the vote for the chamber of deputies. A protest movement called “5 Stars”, also in the euroskeptic camp and headed by former comedian Giuseppe Grillo, gathered 25.6 percent of the vote.

Berlusconi had also been ahead in the race for Senate, but Bersani in the end won the most votes there too with 31.6 percent. Again, Berlusconi came close with 30.7 percent and 5 Stars was strong with 23.8 percent. The Senate, however, does not award the winner of a relative majority of the votes an absolute majority of seats. Since no party has an absolute majority in the Senate, nobody can form a government. 

The likelihood of new elections in a few months’ or weeks’ time and the strong showing of the euroskeptic parties scared markets, as Italy’s commitment toward the euro common currency is being questioned.

“The outcome also reflects the collision between two macro trends we have long warned of: the rise of anti-establishment sentiment and the increased skepticism towards European obligations in the midst of a slow-growth or no-growth economic situation,” writes Citigroup.  

Market movement reflected the outcome of the elections all along. After spiking up to 1525 in expectations of a Bersani win, the S&P 500 quickly lost 37 points to close at 1487 Feb. 25 as it became increasingly clear that no party would take a majority. 

As official results rolled in Feb. 26, Italian stocks were severely punished, trading down 4.7 percent during the morning trading session in Europe. Germany’s Dax was down 1.8 percent in the early afternoon, outperforming its Italian counterpart. S&P 500 Futures point to a slightly higher New York open on Feb. 26.