This is what happens if there’s a hung parliament in Italy

Quartz

The latest projections on the outcome of the Italian elections indicate that neither Pier Luigi Bersani’s center-left party (perhaps with the help of former PM Mario Monti’s small following) nor Silvio Berlusconi’s center-right parties are likely to win a clear-cut victory in today’s Italian elections.

Investors see a center-left victory as key to continuing the economic reform policy that has bolstered confidence in the country during the last year. Although more than 11% of Italians—and 36% of young Italians—are unemployed, the country passed numerous economic reforms during Monti’s tenure, from late 2011 to date. Bersani is unlikely to be as ardent a reformer, but investors consider almost anything to be better the return of Silvio Berlusconi and his cronies.

It looks likely that an alliance of Monti and Bersani will win a clear-cut plurality in the lower house, winning them a 55% premium afforded by Italian law to the largest party or alliance. However, no party convincingly leads in the Senate, according to the most recent polls. A third party, Five Star (M5), led by populist comedian Beppe Grillo has won a surprising amount of support, but his party is a wildcard. Mainly focused on reforming an electoral system it finds corrupt, it has gained support from all sides of the political spectrum. A lot of the party’s momentum has come in the last week.

Thus the big fear is that Italy will end up with a hung parliament for the first time in its history as a republic. If Bersani and Monti together fail to win a majority of the Senate’s 315 seats, then hard-to-stomach reforms and anti-austerity policies could both end up failing in the lower house. The lack of a clear majority would normally force parties to negotiate to form a grand coalition to make a stable government, but Bersani’s party has ruled out the possibility of uniting with Berlusconi’s. That means that any control Bersani and Monti exert over the Senate would be tenuous, and thus likely to dissolve.

It’s possible that the parties could install another technocrat at the head of its government. “This would be the sort of ‘out-there’ scenario,” says Ian Limbach, a PR consultant who works with major multinational businesses in Italy. Monti is unlikely to qualify for this role, having already thrown his hat in the political ring.

Without clear leadership, it’s possible that voters would soon have to return to the polls for a re-vote. A new vote would smack of Greece’s political turmoil last year. Greeks were forced to endure two rounds of parliamentary elections, after radical opposition party SYRIZA won a surprising amount of support. The old parties—Socialist PASOK and center-right New Democracy—had governed Greece since it became a democracy, but were hard-pressed to win a clear majority that could overwhelm the opposition. Although ultimately able to form a coalition, the tension-fraught elections shone a light on increasing resistance to austerity policies in Greece.

Berlusconi and Grillo both gained ground in the last few weeks up to the election, Berlusconi for his campaign techniques (namely, impossible promises) and Grillo for his anti-establishment rhetoric. The less-than-charismatic Bersani has lost ground in the lead-up to the elections, and Monti has barely campaigned. It’s not clear which, if any, of these trends would continue in the event of a new election.

“There is a real sense that this is not a good result whatever happens,” Limbach adds.

As Europe’s third-largest economy, Italy’s stability is crucial to Europe’s future as a monetary union. A falling euro shows that investors are already worried about the effect an unstable Italy could have on the currency union:

The euro has fallen since news that Bersani and Monti might not score a majority in the Senate. Marketwatch

Not to mention that yields on Italian bonds—the price the country has to pay to borrow—spiked on news that the country could see a hung parliament. Higher bond yields have been seen during the euro crisis as an indication that investors are losing faith in a country.

Yields on Italian 10-year bonds spiked after news that Berlusconi could be leading the Senate.

For the latest updates on the Italian election, check out our live blog.



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