Italy In Political Limbo After Knife-Edge Election

by Ulrika Lomas, Tax-News.com, Brussels

13 April 2006

Romano Prodi's centre-left alliance managed to squeeze home in the most tightly fought Italian election of recent times, although Prime Minister Silvio Berlusconi's reluctance to throw in the towel means that Prodi may have a tough time implementing his economic and tax policies, if declared the country's new leader.

One of the key elements of Prodi's economic reforms is a pledge to cut the social security burden borne by companies by 5% in the first few months of a new government.

Many doubt that with Italy under pressure from the EU to cut its budget deficit, and with the country's national debt the third highest in the world, he will be able to afford the EUR10 billion needed to fund the tax cut, especially given the fragile balance of his coalition.

Prodi has also pledged to increase capital gains tax on the sale of most securities to 20%, in part to fund the reduction in the social security tax burden. He also wants to reinstate an inheritance tax that was abolished by Berlusconi, and implement a crackdown on tax evasion.

The centre-left won in the lower house by a margin of just 25,000 votes out of 38.1 million cast. With extra seats awarded to the winning coalition under Italian election rules, Prodi's alliance has 348 seats in the lower house, compared with 281 for Berlusconi's centre-right coalition. But in the upper house, Prodi has a majority of just two seats, with his side winning 158 against 156 for the centre-right.

However, Berlusconi wants about 40,000 disputed ballots to be checked before conceding defeat, saying there were "many murky aspects" to the poll, meaning that the result will not be declared until Italy's highest court has approved the election.

Moreover, under Italy's constitution, the President must nominate the new government after consulting with party leaders, and with the current head of state Carlo Azeglio Ciampi set to step down on May 18, the new government will likely be appointed by his successor, meaning that Italy will remain in political limbo for some weeks yet.

Prodi claims to be able to form a "strong" government and has rejected overtures from Berlusconi about forming a German-style left-right coalition. However, Prodi is expected to have his work cut out just keeping happy his loose nine party coalition, which ranges from communists to christian democrats, meaning that he may struggle to implement his economic and tax programme - the centre-piece of his campaign - even with a convincing majority.

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