EUROPE COMPASS

Too big to fail On Saturday, Italy's 87-year-old Giorgio Napolitano relented under the pressure of the main political parties and agreed to stand for re-election as president. By late afternoon, he had received an unprecedented second mandate, with more than two-thirds of the Italian electoral college voting their support. The rest of the world's leaders breathed a sigh of relief. Italy is too big to fail. This outcome was unexpected. Napolitano had made it clear for over a year that he did not want to continue in office. The physical and psychological demands of presiding over a divided Italy in turbulent times have exacted their toll. Napolitano is tired; he has earned the right to reflect on his long experience in public life. However, the main parties would not let that happen. They failed to agree on a consensus candidate to stand for office. Democratic Party (PD) leader Pier Luigi Bersani and centre-right People of Liberty (PdL) leader Silvio Berlusconi put forward a joint nominee at the start of the process, but the PD's followers refused to follow. Then Bersani's centre-left put forward its own consensus candidate. The rank and file of the PD reneged on that choice as well, despite having endorsed their candidate unanimously that same morning. This left the country facing an interminable presidential election. Re-electing Napolitano was the only way to avoid such an impasse. Both leaders and followers in the main political parties were more willing to embrace the president they knew than to agree on some other candidate. In the end, Napolitano accepted the impossibility of the situation. These opening paragraphs are written in the Italian journalistic style. Italian journalists like to emphasise the dramatic, but at times like this a little dramatic flair seems appropriate. Italy really is too big to fail. Napolitano has sacrificed a quiet retirement to make sure that does not happen. He has not committed himself to remaining the full seven years in office. He has not announced an early end to his mandate, either. The constitution does not allow for that. He can resign, of course, but he cannot officially limit his term in office.

In search of a grand coalition Hence Napolitano accepted a full mandate -- one which will end shortly before his 95th birthday. The price he demanded in exchange for this service is a grand coalition government between the centre-left and centre-right. In practice, this means that that a deeply divided PD will have to share political responsibility with Berlusconi's PdL and his allies. However, the PD has already lost some of its own allies: Nicchi Vendola's Left, Ecology and Freedom did not vote for Napolitano and will not take part in any grand coalition; former Prime Minister Mario Monti's centrist Civic Choice will attempt to fill the gap. The centre-right remains more united. On Berlusconi's side, the Northern League (LN) of Roberto Maroni will not participate officially, but will offer support in parliament; Maroni is not eager to face new elections given recent divisions within the LN.

Too big to fail -- and to save? A grand coalition including the PD, PdL and Civic Choice, supported by the LN, is the best-case scenario. We will start to know only on Wednesday if it comes to pass. The goal will be to fulfil the legislative agenda pulled together by the 'ten wise men' prior to the presidential election, which includes: reforming the electoral system first and foremost; overhauling representative institutions; consolidating the state finances; and freeing up the marketplace. This is an ambitious programme, especially since Napolitano is rumoured to want the grand coalition to last for at least 100 days. Nor is this agenda universally endorsed. Beppe Grillo and his populist, anti-elite Five Star Movement oppose both the return of Napolitano and a stable grand coalition government. Grillo greeted Napolitano's candidacy with a call to millions of his followers to march on Rome. As day turned to evening, and Grillo's preferred presidential candidate Stefano Rodota appealed for calm, Grillo relented. He has not given up the fight but he is not ready to overthrow the government through direct action. Even Grillo recognises that Italy is too big to fail.

Advantage Berlusconi The question is whether Italy's main political parties are capable of making the effort. Berlusconi and his PdL are the only clear winners from the debacle that has unfolded over the last few days. They agreed on a common candidate that the followers of the centre-left rejected; they rejected a centre-left candidate that the PD could not sell to their own rank and file; and they supported the return of Napolitano all along, despite the fact that Napolitano is a former communist who played a key role in bringing the last Berlusconi government to an end. As a result, and despite his many legal difficulties, Berlusconi looks to many Italians like the only statesman willing to make concessions in the interests of the country; it is small wonder, therefore, that Berlusconi and his party are up in the polls.

Early elections? Berlusconi has every incentive to seek early elections and so take advantage of a divided left. Under the current electoral system, the PdL has a good chance of capturing the Chamber of Deputies; it may succeed in improving its position in the Senate as well. Any delay only buys time for the PD to re-establish itself, perhaps around the leadership of a younger generation. For instance, the increasingly popular mayor of Florence, Matteo Renzi, has not emerged from the recent turmoil unrivalled or unblemished, yet he remains a potent force. If Berlusconi has incentives to defect from the agreement, the PD has little capacity to enforce it. Few doubt that Berlusconi's PdL will drive a hard bargain in exchange for supporting a grand coalition. The main issues will focus on the judicial system and taxes. Both will be hard for the rank and file of the PD to swallow -- particularly with Vendola campaigning against them from even further to the left. Moreover, Berlusconi has every interest in pushing the PD to the limit because the worst that can happen is that it will splinter further and take the blame for the government's collapse. The PdL is in a win-win situation in this respect. This leaves us with two other scenarios in addition to Napolitano's 100-day agenda: In one, the main political parties fail to agree on a coalition and Berlusconi takes his party to the polls against a divided left. In the other, Berlusconi supports a grand coalition government while at the same time pushing concessions on the centre-left that drive the PD to the breaking point beyond which it makes more sense to bring down the government than to risk further division. Failure to form a government would mean elections as early as this summer or perhaps as late as the autumn. An unstable coalition could hold together for a few months or maybe more. Perhaps elections could be held off until next spring. Meanwhile, Grillo's Five Star Movement would remain a wild card in the left-right contest. Napolitano's re-election reflects the fact that Italy is too big to fail; unfortunately, Italy is not safe now that Napolitano has been re-elected.

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