Italy’s new electoral law isn’t ‘Five Star’

After months of wrangling, the Italian parliament has finally passed a new electoral law. The new rules will make it much harder for the anti-establishment Five Star Movement to come to power. They will not, however, give Italy the stability it needs to escape the low-growth trap.
The law is a complex combination of first-past-the-post and proportional representation. Any party which takes more than 3 percent of the vote will be guaranteed a seat in parliament (for coalitions, the hurdle is 10 percent). However, the new law favors coalitions over individual parties, since they will be more likely to scoop wins in individual constituencies. The Five Star Movement has staged several protests against the law. It is not hard to see why. The fiercely anti-establishment party is reluctant to strike alliances; it would prefer to remain flexible to poach votes from both left and right. Five Star is at a disadvantage to coalitions under the new rules.
The constraints blocking the advance of Five Star will no doubt reassure market participants. Many investors I speak with during their trips to Rome mention a Five Star government as their main fear for Italy’s future. The main reason is the party’s long campaign in favor of a referendum on the euro, which would inevitably spook markets and may even cause a bank run. While Five Star has recently softened its anti-euro message, the price of exit is far too high for investors to take a risk.
This does not mean, however, that the new law favors stable, effective governance in a country that has had more than its share of political upheaval. One problem is that the law makes it quite hard for a single coalition to win an outright majority. There is currently a three-way split in Italian politics, with voters divided between the center-left Democratic Party, a likely center-right alliance of Forza Italia and the Northern League and the Five Star Movement. Under the new law, elections, expected next spring, will most likely be a hung parliament and a sort of grand coalition government.
Recent history suggests that’s a recipe for gridlock and instability. Unlike northern European countries such as Germany or the Netherlands, Italian parties do not sit down for months and negotiate point-by-point deals before teaming up in government. Rather, they form a cabinet first and then negotiate ahead of each individual vote. The result is that interest groups find it easier to water down reforms. An additional risk is fiscal slippage: Though Italy has run relatively prudent public finances in recent years, notwithstanding the enormous sovereign debt, a messy coalition makes it more likely that the budgetary rigor will be sacrificed for political objectives.
That doesn’t bode well for Italy’s economic prospects. A cyclical recovery is underway, but most international organizations – from the International Monetary Fund to the Organization for Economic Cooperation and Development – agree that Italy’s long-term growth rate will remain low. To lift it, Rome needs to take measures such as improving its justice system to attract more foreign investment and opening up professional services, where restrictive licensing and trade bodies prevent competition. All of this is less likely to happen under a grand coalition.
Whether an ineffective government of left and right might boost the chances of the Five Star movement at the next election is more difficult say. The anti-establishment party is finding it is much harder to govern than it is to protest. Virginia Raggi, the Five Star major of Rome, has failed to shake up a city which has become a symbol Italian decay. Other Italians are noticing, putting a lid on how much more Five Star can grow.
The new electoral law treats the symptom of Italy’s problems but not the underlying cause. Investors may rejoice to see Five Star sidelined. The trouble is that no responsible party looks set to take the center stage
instead.

— Bloomberg