On the basis of the new electoral law in Italy, 64% of seats will be elected via proportional representation and the remaining 36% on a first-past-the-post basis. The option allowing parties to form electoral alliances is new. Where the populist M5S grouping has declared that it is unwilling to enter an electoral alliance with any other entity, the other parties are already busy forging new coalitions. Forza Italia (centre-right) and the Lega Nord (right-wing populist), which may well pool their resources in a right-wing alliance, will probably benefit even more from the new electoral law than the PD, which could make common cause with other left-wing parties.
None of these alliances – which could each pick up around 30% of total votes cast – currently has a realistic chance of obtaining an absolute majority of seats at next year’s parliamentary election. But forming coalitions will probably prove anything but easy. The M5S and the right-wing parties share the same populist, Eurosceptic strategy, but the M5S does not hold any decidedly right-wing nationalistic positions. The M5S and the PD are closer together in the social-policy field but it would run counter to the M5S’s image of itself to enter a coalition with – of all parties – the established PD. One thing which the parties in a left-wing alliance led by the PD would have in common with the right-wing parties Forza Italia and Lega Nord is that none of them are newcomers to Italian politics. But the social-democratic PD would have a difficult time with the Lega Nord’s right-wing nationalistic stance. Once again, Italy faces a threat of politically turbulent and instable times.
From the market’s point of view, the upcoming election campaign spells many potential risks. Since two of the three electoral alliances must be viewed as Eurosceptic and since at least one of these two could be part of the new government, it is very probable that future negotiations between Rome and Brussels will prove more thorny than at present. For investors, an alliance between the M5S and right-wing parties would be the least favourable constellation because both parties/alliances would embark on a decidedly anti-EU tack. Investors would factor in at least the possibility of a referendum on EU membership, which could lead to increasing uncertainty on the bond market. And even if an exclusively populist alliance were not to materialise, a share in government for the M5S or right-wing groupings would also have a negative impact on the country’s economic and fiscal policy and thus on its debt sustainability. A spike in risk aversion in the financial markets would be on the cards the moment a right-wing alliance formed and if Eurosceptic and anti-austerity voices were to become louder during the election campaign.