Italy's election could be brought forward

Italy's election could be brought forward

4 June 2017, 08:03
Jiming Huang

The four major parties appear to broadly agree on electoral and parliamentary rules. The new system would favor broad coalitions and reduce the chances of an anti-establishment victory. This system entails a proportional structure that requires a party to receive 5 percent of the popular vote to gain seats in parliament.

This threshold would reduce the political fragmentation that was exacerbated by last year's constitutional referendum. Matteo Ramenghi, Chief Investment Officer UBS WM Italy, thinks that "a 5 percent threshold would in effect increase the number of seats controlled by the major parties and reduce those allotted to the small ones" a positive development in his view. However, the threshold does not necessarily prevent a hung parliament.

Up until the 1990s the Italian political system was based on a proportional representation. This was replaced by a majority electoral system. According to CIO, while this was designed to increase political accountability and stimulate growth, it had the opposite effect and resulted in the inability of the government to enact reforms. A new electoral system would reenergize the electorate whilst the likelihood of 5SM (or any other party) wining an outright majority would be extremely low with this system. Alleanza Popolare (AP) is one of the parties that may no longer surpass the 5 percent threshold; in fact its leader, Foreign Minister Angelino Alfano, has threatened to withdraw his support for the government on that basis, which could lead to elections in the fall instead of at the beginning of 2018.

CIO believes that, depending on local elections in June and quick passage of the electoral reforms, autumn elections are possible. These local elections will provide an interesting snapshot of the Italian political scene. "Early elections might create some near-term volatility while removing some advantages for antiestablishment parties – particularly in light of what could be a tough 2018 budget law that might erode the popularity of the parties preparing it," Ramenghi says.

Given that the 2018 budget law will require meaningful spending cuts and increase in tax to offset VAT hikes, there is a greater likelihood of early elections. If the President permits elections to take place in the fall, CIO believes he would do so based on some pre-arranged budget approval with the political parties. "If not, failing to quickly form a government would lead to the current austerity clauses being applied that would sharply raise the VAT and almost certainly harm the economic recovery," says Ramenghi.

(By UBS)

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