What Happened
In Italy, an upcoming referendum could create political uncertainty during the first half of 2020, although the current government is likely to remain in place. In May or June, Italian voters will decide whether they support a constitutional reform to reduce the number of seats in the Chamber of Deputies from 630 to 400 and in the Senate from 315 to 200. The referendum could force an early general election, especially if any of the parties in government push to hold a snap poll before the reduction in the number of parliamentarians becomes official and before changes in electoral law to establish how the members of a smaller Parliament are elected could be enacted.
While it's improbable that a push for an early election would succeed, if it does occur, it could allow the Euroskeptic League party to gain control of the government. The chances of a victory by the League, some of whose members want Italy to exit the eurozone, would make businesses, investors and financial markets nervous.
Why It Matters
In October when Italian lawmakers approved the parliamentary reform, they justified it as an opportunity to cut public spending, but unofficially, the move was made as a gesture to an Italian electorate that has grown increasingly skeptical of its political leaders. While most political parties (including the governing coalition Five Star Movement and Democratic Party, and the opposition League) approved the reform, a group of senators started collecting signatures from their colleagues to force a referendum (a step not originally needed for the constitutional changes to be enforced). On Dec. 18, they announced that they had sufficient signatures to put the referendum on the reform before voters. That vote will occur sometime in May or June.
Opinion polls suggest the reform stands a good chance of winning approval. Should voters reject the changes, there would be no meaningful institutional impact because the status quo would continue. The main question is whether the prospect of a smaller Parliament (in which many current lawmakers would lose their seats) would incentivize members of Italy’s coalition government or its parliamentary allies to provoke a political crisis that would precipitate an early election before the referendum. (Should a general election occur before the referendum, the size of Parliament would remain unchanged.) In addition, eight of Italy's 20 regions will hold regional elections between January and June. A weak performance by the Five Star Movement and the Democratic Party in those elections would only increase the friction between them, making their alliance harder to sustain.
The Political Calculations
At this point, there is little chance that lawmakers would provoke a snap election before the referendum because those precipitating an early vote would have a hard time convincing voters that they were not doing so merely to save their jobs. And even in the case of a government crisis, Italian President Sergio Mattarella would be reluctant to dissolve Parliament and authorize a vote before the changes in the composition of Parliament are enforced. Lawmakers may have an additional motivation to avoid an early election: Italy will probably need a new electoral law to account for a smaller Parliament. This will give the Five Star Movement and the Democratic Party incentive to remain in power so they could try to influence those changes according to their own political needs. On the other hand, some of the government’s junior allies, such as former Prime Minister Matteo Renzi’s Italia Viva party, may want to provoke an early election out of fear that new election rules could make it harder for small parties like theirs to win seats.
The upcoming referendum seems more likely to guarantee the continuity of the current government than to trigger its collapse. Still, with opinion polls showing that the League is Italy’s most popular party, meaning it stands a good chance of accessing power in a general election, markets and investors will monitor Italian political developments closely.
