MS Risk Blog

EU’s Electoral Season: Is Italy Closer to Being the Next?

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The last six months have been anything but easy for the Italian political system. Since Prime Minister Matteo Renzi resigned in December after the country’s voters rejected his constitutional reform package in a referendum, and Paolo Gentiloni replaced him the following month, Rome has had to face a lot of challenges, from financial issues among banks and large companies to pressure from the European Union to reduce Italy’s fiscal deficit. The constitutional referendum’s failure has just fueled the flame, aggravating tensions in the ruling center-left Democratic Party, which governs with support from small centrist parties, prompting some of its members to break off and form a new party.

To further complicate matters, Renzi has expressed his intention to return to the premiership, and he regained his post as head of the Democratic Party after winning his party’s primary the 30th of April.

Though rumors of snap elections have been circulating in Italy since Renzi resigned, Italian President Sergio Mattarella said, since the very beginning, he would not dissolve the Parliament and authorize an early election unless lawmakers harmonize the disparate electoral laws governing the legislature’s two chambers. The Senate and the Chamber of Deputies have equal legislative powers, but their members are appointed by different mechanisms. As a result, different parties can win control of each chamber, complicating the legislative process. Early last month, the heads of the four major parties in parliament promised Mattarella they would hold a debate on a new electoral law in late in May.

Obviously, each of the four leading party (Five Star Movement, Democratic Party, Forza Italia and Northern League) pushed for the kind of reform it believes would best serve its interests. Renzi and the Five Star Movement, currently polling neck and neck with the Democratic Party, have both advocated instituting a majoritarian system that would grant bonus seats to the winning party. After all, they each hope to win enough of the vote to secure a single-party government. Smaller parties, on the other hand, prefer proportional systems and espouse allotting bonus seats to the winning coalition. A dissident faction in the Democratic Party also favors this idea since it would hurt the Five Star Movement, which has so far refused to form alliances with other parties, including the Northern League.

The 6th of June the full assembly of Parliament’s lower chamber started discussing a proposal that seats political parties according to the percentage of overall votes they receive. Under the plan, parties would have to get at least 5 percent of the vote to get any seats at all. Opinion polls indicate that only four parties would exceed the bill’s 5 percent threshold. Democratic Party leader Matteo Renzi wanted to get support for a new electoral law as soon as possible, but the polls suggested the system would not produce a majority government and parties should form coalitions,

However, after just two days, the 8th of June the deal between the Five Stars Movement and the Democratic Party on the electoral proposal unraveled, leading to calls for a snap election that could usher in more instability in the euro zone’s third largest economy. The accord collapsed after the PD lost a parliamentary vote on a minor, proposed amendment. As a result, the Five Stars Movement and the right-wing Northern League called for an immediate vote, and the ruling Democratic Party (PD) said it now seemed hard for the government to carry on. Nonetheless, the parties agreed to take the legislation back to a parliamentary committee to resume the negotiations, but comments from leaders held out little hope of progress.

On the markets, Italian bonds and stocks rose as investors bet the breakdown of the accord would reduce the risk of early elections this year, with opinion polls pointing to an inconclusive outcome.

Should Italian lawmakers fail to introduce a new electoral law by March 2018, the deadline for dissolving Parliament, the country can still hold elections under the existing laws. Doing so, however, could put different parties in control of each chamber of the legislature, thereby complicating Italy’s policymaking process. On the other hand, even if Italy’s lawmakers settle on a new electoral law, though, the government will likely postpone the vote until the end of the year at the earliest. The Italian Constitution stipulates that the government must wait at least 45 days after dissolving Parliament to hold a new vote. In mid-October, the government will have to present its 2018 budget to Parliament. Considering the pressure the EU Commission has put on Italy to cut spending and increase taxes, the country’s major political parties may opt to delay the vote and let Gentiloni take the fall for introducing austerity measures.

Regardless of when the vote occurs, Italy’s next general election will pose yet another challenge for the eurozone. Of the four most popular Italian parties, only the Northern League has demanded a referendum on Italy’s membership in the eurozone. The Five Star Movement has so far made no mention of a referendum in its electoral platform, though its leader, Beppe Grillo, has called for the country to pull out of the eurozone. Forza Italia has blamed the euro for Italy’s weak economic growth and suggested reintroducing the lira as a parallel currency. The Democratic Party is the only leading political group in Italy that explicitly supports the European Union, and even so, Renzi has often criticized Brussels’ push for austerity and attacked EU officials.

Whether it happens sooner or later, the upcoming election in Italy will be a crucial test for the eurozone. The country has the second highest public debt in the currency area and the highest debt level in absolute terms. Its economy has barely grown over the past decade, and its unemployment rate has stayed high, yet its ossified political institutions keep much-needed economic reforms at bay. More important, surveys suggest that support for the euro is especially low among Italian voters, relative to those elsewhere on the Continent. As a result, even the country’s most pro-European politicians are critical of the bloc.