Italy: The Road to Early Elections

Published on January 26, 2017
SGH Insight
Some pressure against early elections is mounting within the PD’s southern region governors, who are resisting Renzi’s leadership, and would like to challenge him internally in a party conference to decide the PD’s prime minister candidate. Even though this challenge is unlikely to succeed, Renzi cannot force an election without first dealing with internal opponents – lest having to fight an election without the unconditional support of his party.

Furthermore, Renzi does not control the majority of the PD Deputies. Without their support, it would be impossible to force Mattarella’s hand to elections through a no-confidence vote against Prime Minister Paolo Gentiloni.

Market Validation
(Bloomberg 2/14/17)
Italian bonds led gains in Europe after former Premier Matteo Renzi called a congress of his Democratic Party, reducing the chances of an early election in the nation.

Italy 10-year yields drop 3 basis points to 2.20 percent; analysts now look to early 2018 as most likely time for new elections; Italy-Germany 10y spread now tighter by around 10bps this week.

Yesterday’s Italian Constitutional Court judgment declaring the Italicum electoral law partially unconstitutional appears to have paved the way to early elections before the summer.

The judgment, by making the Chamber of Deputies electoral law more like the Senate law, has partially eased fears of an election leading to two distinct majorities in the two chambers.

But the result still falls short of generating a system that would ensure political stability. And that is leading to a broad sell-off in Italian BTP bond markets.

*** A June early election, the current base case for most analysts, could still be postponed as President Sergio Mattarella is not yet fully on board with dissolving the Parliament. Mattarella would, ideally, still like to see further harmonization of the two laws through legislative action before elections are held. And a deeply divided Democratic Party is unlikely to force his hand by calling a no-confidence vote on Prime Minister Paolo Gentiloni and risk political suicide. ***

*** But ultimately, a delay could be a positive if and only if the Parliament comes up with an electoral law that has the potential to deliver stability, and that for now does not appear to be its objective. That is because both parties in the Parliamentary majority are currently keen on a system that does not deliver a clear winner, in order to avoid the risk of the 5Star Movement jumping to power.  ***

President’s Doubts and PD’s Infighting

Italy’s 5Star Movement, Northern League party, and Renzi’s allies within the PD have all come out screaming for an early vote on the heels of the constitutional judgment on electoral law reform yesterday.

But President Sergio Mattarella has publicly pushed back on early elections. He is said to be waiting for the release of the judgment’s “motivations,” on February 25, for some clarity on how to potentially further amend the law, before deciding the way forward.

Meanwhile, some pressure against early elections is mounting within the PD’s southern region governors, who are resisting Renzi’s leadership, and would like to challenge him internally in a party conference to decide the PD’s prime minister candidate. Even though this challenge is unlikely to succeed, Renzi cannot force an election without first dealing with internal opponents – lest having to fight an election without the unconditional support of his party.

Furthermore, Renzi does not control the majority of the PD Deputies. Without their support, it would be impossible to force Mattarella’s hand to elections through a no-confidence vote against Prime Minister Paolo Gentiloni.

Most PD MPs are indeed worried that they won’t be confirmed if new elections are held, both because many will not be able to run (Renzi alone will have the power to choose the 100 top candidates, leaving the others to fight for the scraps) and because in a purely proportional system the PD – barring the unlikely event that it reaches 40% of the votes – will at best get around 200 seats, not even close to its current 303.

On top of that, a whopping 608 deputies have a more trivial reason to punt, as they eye the September, 2017 day when they will obtain the right for lifetime pension – or “vitalizio,” always a powerful argument in Italian politics.

Resistance to Reforms

The Constitutional Court yesterday struck down the law’s signature second round runoff, which would have delivered a clear winner, and “transformed” it into a purely proportional system with a virtually unreachable majority prize set at 40% in the first – and now only – round.

The Chamber of Deputies and the Senate are now both elected on a proportional basis, but with very distinct features that would – if elections were held – most likely give different majorities and almost certainly make governing very difficult.

But any alternative is currently thwarted by political gridlock in the Parliament, where virtually every single party has its own priorities when it comes to the electoral law.

And it doesn’t help that the parties holding the current majority (as well as Forza Italia on the side) are perfectly content with that structural instability, an instability that would allow them to recreate the status quo.

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