Mr Gentiloni (Mr Kind), the newly sworn in Italian Prime Minister, is a well respected former journalist and experienced politician. Yet, despite his name, he will likely oversee to a period of turbulent political and economic tensions. I give the TROIKA scenario , defined by high political instability, capital flights, rising bonds spread and possible bank runs, a probability of above 50%. The following picture sketches the reasoning behind this conclusion. All described probabilities are obviously my own priors.You can pick yours and draw your conclusions.
Simplifying a lot, there are two possible scenarios, Agreement and No agreement, and two possible outcomes, the TROIKA and BAU, business as usual.
Agreement on Electoral Reform
In the most favorable scenario, probability say 40% , Gentiloni manages to have the Parliament quickly approve a new electoral law. This can either be proportional, or majoritarian with a premium for the winning coalition, or majoritarian with a premium for the winning party. The last case is the least likely (10%) since it will favor Grillo’s M5S in the elections. And if Grillo wins, I thinks there is a 50% probability that his fanciful policies of Minimum Incomes, Deficit Financing and Euro-Referendum will lead directly to the TROIKA outcome. If instead Gentiloni manages to have a majoritarian/coalition electoral rule, Renzi’s come back will be extremely likely, and then BAU will be the outcome. Finally, should proportional representation emerge as the new electoral law (45% probability), a hung Parliament will result, leading to either a Grand Coalition (not likely, 30% probability) and BAU, or to a messy situation (CASINO) followed by the TROIKA outcome.
If Gentiloni gets stuck in endless negotiations, the electoral law will be effectively decided by the Constitutional Court’s ruling expected in mid January 2017. This will probably replicate a proportional system, with the consequences discussed above.
The logical consequences of this reasoning can be drawn by summing up the probabilities for the BAU and the TROIKA scenario. The latter gets 56.6% probability. While a lot of uncertainty surrounds this number, its is very hard to reduce the probability of a TROIKA scenario below 50% by reasonably changing the assumptions