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Italy – Electoral Law Puts M5S at a Disadvantage

The main governing PD has been preoccupied for the past several months with passing a new electoral law in advance of a general election required by May 2018. The Parliament recently approved the so-called “Rosatellum” law, under which parties will be permitted to form alliances prior to the elections, and will fill slightly more than one-third of parliamentary seats on a first-past-the-post basis, with the remainder divided proportionally among the parties that achieve the minimum vote threshold. The law is specifically designed to create a disadvantage for the populist and euroskeptic M5S, which refuses to ally with other parties on principle.
The electoral law was approved with the backing of the PD, Silvio Berlusconi’s center-right FI, and the far-right populist LN, but M5S has appealed to the courts to throw out the law on constitutional grounds. If the challenge fails, Prime Minister Paolo Gentiloni is expected to quickly call for an early election that, based on recent polls, will produce a three-way split among M5S and center-left and center-right coalitions headed by the PD and the FI, respectively.
If neither a center-left nor a center-right coalition wins an outright majority of seats, the only path to a majority government that excludes M5S could be a grand coalition of the PD- and FI-led blocs. Otherwise, a center-right coalition headed by the FI that includes the further-right LN and FdI probably has the best chance of claiming a majority of seats. From the standpoint of market stability, either of those outcomes would be preferable to a victory for M5S, which is not a trivial consideration given the still-fragile state of the banking system and an economy that is on track to grow by more than 1% for the first time in seven years.
In that regard, new rules for dealing with bad loans proposed by the ECB’s banking-sector regulator, while merited, figure to cause more harm to Italy than to other euro-zone members in the light of the magnitude and structure of its debt problem. In the near term, the result would be a tightening of credit availability that will create a drag on economic growth.
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