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Update on Italy: the twisty road to elections

27 October 2017 by Elena Rinaldi

Last time we talked about Italy in our blog was December last year (Market Reaction To Italian Referendum) after the Italian Referendum result saw the rejection of a constitutional law that was meant to reform the composition and powers of the Parliament.  Following the victory of the “no” vote, Renzi resigned from his role of Prime Minister and Paolo Gentiloni was selected as his replacement.

After ten months of debates, this morning the Parliament finally approved a new electoral law. After a series of confidence ballots among the Chamber and the Senate, the electoral reform, known as Rosatellum, received the green light by the Senate with 214 votes in favour and 61 against. The final vote was supported by an agreement between the ruling centre-left Democratic Party, the centre-right Forza Italia party and  eurosceptic Northern League.

The new law will bring some changes in the way the citizens can vote. It will be a proportional mixed system, meaning that two thirds of the seats in the two houses of parliament will be elected by  proportional representation and one third by first-past-the-post ballots. To become entitled to any representation in the parliament a party must achieve a minimum of 3% of the national votes, both in the Senate and the Chamber. In addition to the 3% threshold, a minimum threshold of 10% is required for coalitions. Another important change is that the Senate will be elected on a regional basis and therefore will be less dependent on the national total of Senate votes. The first-past-the-post element will benefit parties that have a strong local base, like the Northern League, which could win a large majority of seats in the north.

The approval of the law strengthens the government ahead of the budget law due before the end of the year. After that it’s likely that Italy’s president Sergio Mattarella will dissolve the government leading to elections next year around March-April.

The new system will favour coalitions and many parties are likely going to take advantage of that to seek votes. In this scenario, the anti-establishment 5 Star Movement led by Beppe Grillo is expected to be hurt as it has always ruled out the idea of pre-election coalitions due to its strong ideology and its refusal to make compromises. On one hand the new law will harmonise the electoral systems in both houses of Parliament, on the other hand large and solid coalitions will be the only hope for a stable government. No majority is currently in sight though, even the most optimistic projections put the largest coalition at 286 seats in the lower chamber, way short of the 316 needed to form a majority. An anti-establishment coalition formed by 5 Star, Fratelli d’Italia-An and Northern League could be possible (although unlikely) but not strong enough to get the majority.  The right-wing coalition (Berlusconi’s one) instead could rise and steal votes from the centre-left and the 5 star party.

Even if the agreement on the electoral law is positive the country’s political scene is uncertain. Italy has had 64 governments since World War II including 4 in the past 6 years. Despite the history and the political instability the country is enjoying a period of growth and recovery that is also supported by the data released by ISTAT (Italian National Institute of Statistics) today on consumer and business confidence. The index reported an unexpected growth reaching the highest level in two years, with manufacturing, retail trade and market services confidence increased.

This data is encouraging and although a period of political turmoil is unavoidable and Italy could be the next country without a government following Belgium and the Netherlands, the impact on global financial markets might be restrained.



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