This Sunday, Italian voters will go to the polls and vote in an election that may have broad consequences for the fate of Europe. As the fourth largest economy in Europe and the third largest in the Eurozone, a recent uptick in Euroskepticism may result in a new government that is unfriendly to Europe. With the European Union already unsettled by the United Kingdom's decision to leave the Eurozone, there is little desire on the part of Brussels to fight a two-front war against Euroskepticism. However, the most likely alternative to Euroskepticism may involve a coalition with fascists.
How did it come to this?
It's no secret among political scientists that Italy likes to change things up, democratically speaking. The country has averaged nearly one new government per year since the end of the Second World War, and regularly tinkers with its electoral system. Current rules, introduced in 2017, use a complicated form of Mixed-Member Proportional Representation (MMP) for both houses of the legislature. Voters are given a single ballot, but their vote counts for both a single local representative and nationally-allotted party seats in both the lower and upper houses. In effect, one ballot cast within Italy helps to decide the results for 581 seats. Italians residing abroad use a similar system, but are represented by special overseas constituencies.
As with any system of proportional representation, the Italian legislature is subject to widespread fracturing of parties seeking to differentiate themselves and capture just enough of the popular vote to get some of those proportionally-allotted seats. A party only needs 3% of the national vote to be eligible for proportional seats, and a bit over three-fifths of either chamber is comprised of these seats. This has resulted in a situation where the single party with largest support, the Euroskeptic Movimiento 5 Stelle (5 Star Movement, or M5S), is currently at 28% nationally, but a coalition consisting of centre- and far-right parties is at 37%. The resulting government will undoubtedly be decided by post-election negotiations between parties to form a coalition, meaning that all of the small parties fighting for those proportional seats will become kingmakers. Even so, it is unclear whether any government will be able to cobble together 50% of seats in both legislatures to form a majority, which would result in further instability.
What does it mean for markets?
Government instability is always bad for markets, even moreso when the country has a debt load equivalent to 135% of its GDP (second only to Greece), and stagnant economic growth. It is difficult to say which of the most likely electoral outcomes would be worse for Italy, Europe, and markets as a whole. Of the major players, only the Democratic Party (PD) is both pro-Europe and anti-fascist, but they are unlikely to win. The M5S has previously been Euroskeptic, but has been softening its stance in recent weeks, though realities of governing may push it back into the anti-Europe camp. The right-wing coalition is led by disgraced former Prime Minister Silvio Berlusconi, who is currently banned from holding public office due to a conviction for tax evasion, and is still facing charges for solicitation of underage sex, bribery, and corruption. Berlusconi might also be open to a formal or de facto coalition involving far-right fascist parties. While the prospect of an Italian withdrawal from the European Union under M5S might be unappealing to outside observers and could destabilize European markets, so would the prospect of a far-right or fascist resurgence in Italy.