09.06 Weekly Viewpoint : Italy. Major unexpected setback in the electoral law reform process.

Emanuele Fiano, who penned the reform law, has declared that the parliamentary course of the “German” system is over. Chances of early political elections in the autumn now seem slimmer…..

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Italy. The reform of the electoral law modelled on the “German” system, which seemed set to cruise through parliament, founded as it was on an agreement reached by the four main political formations which account for around 80% of MPs, seems to have already been aborted. The “incident” took place when the Chamber approved by secret ballot an amendment already rejected by the House Committee (which wanted to extend the new system to the Trentino Alto Adige region of Italy, where the bill provided for the current system, i.e. the so-called Mattarellum , to be maintained). Votes in favour of the amendment were 270, versus 256 against (with one abstention); the Five-Star Movement, which holds 82 seats, had announced it would vote in favour, and was evidently joined by many other MPs, ultimately totalling 270. At this point, the bill will be sent back to the Committee. The author of the law, Fiano, said that the “German” system experience may now be considered as over.

Two of the parties that had approved the agreement (Five-Star Movement and Northern League) are now calling for elections as soon as possible, to be held using the existing law or following a decree aimed simply at harmonising the voting systems in place for the two houses of Parliament. Forza Italia, on the other hand, has declared it is willing to draw up a new law with the Democratic Party. In any case, the chances of early political elections in the autumn now seem slimmer. In our view, the (likely) rejection of the German system does not change dramatically the scenario in terms of governability, which would not have been guaranteed by the new system, either. The main consequence (probably desired by those who voted the amendment) was to make early elections next autumn a less likely prospect. The position of the main parties will become clearer after the bout of local elections (first round on 11 June, run-off stage on 25 June).

United Kingdom. Shock election outcome for Prime Minister Theresa May: Tories lose absolute majority. Possibility of a coalition government with the DUP: governability no longer smooth, but risk of a no-agreement Brexit is now smaller.

United Kingdom. Another shock outcome (although not entirely surprising, in light of last week’s voting intention polls) came from the elections in the UK, which saw Theresa May incur a serious defeat. The Conservative Party failed to retain its absolute majority (hung parliament), and will be able to keep governing the country only by forming a coalition. The Tories won 318 seats (losing 12: in order to govern alone, at least 326 were required), Labour 261 (gaining 29), the Liberal Democrats 12 (+4), the Scottish National Party 35 (-21), and the Northern Ireland Democratic Unionist Party 10 (+2). The Green party won a single seat (unchanged) and UKIP none at all (-1). This is a negative outcome, although not dramatic purely in terms of its economic implications. For what concerns Brexit, the result of the election should not change the United Kingdom’s ability (or inability) to secure a good agreement with the European Union, as the British government’s bargaining power remains inferior to the EU’s regardless of the political balance of power at home.

The main negative implication, on the other hand, is that uncertainty stemming from the complications of a hung parliament may add, at least in an initial phase, to the uncertainties clouding the conduct of Brexit negotiations, especially in terms of defining the negotiation strategy to follow. Negotiations should have begun in little more than a week, on 19 June, but this date is no longer certain. The EU is pressing for talks to start as soon as possible, while at the same time asking the British government to adopt a clear approach to negotiations. In the near term, uncertainty could generate volatility on the markets, and affect sterling in particular. In fact, the pound corrected immediately on the outcome of the vote, both against the dollar, from GBP/USD 1.29 to 1.26, and against the euro, from EUR/GBP 0.86 to 0.88. By contrast, the positive implication is that May is now stripped of the free hand she would have had in negotiations had she confirmed (or increased) the Tory majority, therefore the risk of a no-agreement exit – which May had again prospected during the election campaign – should now be significantly smaller. After having obtained the Queen’s authorisation to form a new government, Theresa May has said she is ready to appoint the new ministers already today. The options are a coalition government, or the external support formula on key issues.

The parties which have won sufficient seats to take part in a government coalition with the Tories are the Liberal Democrats (which nonetheless have repeatedly declared they would not govern with the Conservatives, nor with Labour, as they are both in favour of a hard Brexit), and the Democratic Unionist Party, which on the other hand seems to be available to talk with May, although this would not guarantee smooth governability, first of all due to the DUP’s openly pro-Europe stance. The positive aspect of a coalition with the DUP is that the party’s leader, Arlene Foster, said she wants a “workable plan to leave the EU”, signalling a commitment to avoid a no-agreement exit. The downside, in more general terms, is that the majority the Conservatives would be able to count on with the DUP is very slim indeed (327 seats, only one more than the minimum required number of 326), and may not assure the political stability, even on purely domestic issues, that the United Kingdom needs at all costs in such a critical phase as the Brexit transition phase will be. The new Parliament will convene next week, on Tuesday, 13 June.

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