Italian Prime Minister Mario Monti got a hero’s welcome last month in Davos, Switzerland, where bankers thanked him for saving Italy. At home, the gray-haired technocrat is widely maligned as he campaigns for elections to be held at the end of February. Monti’s regimen of belt-tightening has rendered him unpopular with voters and created an opening for the return of Italy’s most flamboyant politician: Silvio Berlusconi. The 79-year-old three-time prime minister is attempting a comeback even while he’s standing trial on charges that he paid a minor for sex—which he has denied—and appealing a four-year prison sentence for tax fraud.
The Feb. 24-25 election will be a referendum on austerity. In the 14 months his caretaker government has been in office, Monti has enacted a combination of spending cuts and tax increases that have reassured investors. Italy’s borrowing costs fell to their lowest point in more than two years at a Jan. 30 auction of treasury bills in Rome.
Yet Monti’s belt-tightening has exacted a toll on the euro area’s third-largest economy. Unemployment has been at 11.2 percent since October—a 13-year high. The Bank of Italy expects the economy to contract 1 percent this year, extending a recession that began at the end of 2011. It’s hardly surprising that the latest polls showed Monti’s coalition languishing in fourth place, with 14.2 percent support. A Feb. 1 survey by SWG Institute showed that Berlusconi trails by only 5 points the front-runner, Pier Luigi Bersani, whose coalition has 32.8 percent support. The 5 Stars Movement, headed by comedian Beppe Grillo, came in third, with 18 percent.
Berlusconi isn’t coy about running as the anti-Monti. At a Feb. 3 press conference in Milan, the center-right candidate promised to give Italian taxpayers a cash rebate of €4 billion ($5.4 billion). The refund would cover tax payments on first residences made by Italians last year following the introduction of a property levy, known as IMU. Monti immediately attacked his rival’s plan during a Feb. 4 radio interview: “Berlusconi wants to buy the votes of Italians with the money that Italians had to turn over to cover up the shortfall left in the public accounts by Berlusconi, who governed for eight of the past 10 years.”
Besides calling for the property tax rebate, Berlusconi has pledged support for an amnesty for Italians who owe back taxes. He also has promised to suspend a regional corporate levy known as IRAP in five years.
Berlusconi’s surge in the polls threatens to deprive Bersani’s center-left coalition of the majority it would need to form a government—even if it were to form an alliance with Monti’s forces. That’s a scenario investors find unnerving. Italy’s benchmark stock index suffered its biggest drop in six months on Feb. 4, falling 4.5 percent the day after Berlusconi announced his tax-rebate plan. “It is increasingly likely that the shape of the government will be decided as a consequence of post-election alliances,” Silvio Peruzzo, an economist at Nomura Holdings, wrote in a note to clients. “This is a recipe for instability and could be a catalyst for uncertainty in the market.”