(Bloomberg View) -- Italy's main political parties are edging closer to agreement on a new electoral law, which could pave the way for an early election in the autumn. In theory, this ought to be good news: Italy faces formidable economic challenges; a newly-elected government would have a fresh mandate to deal with them.
In practice, however, a snap election is an unnecessary gamble. The vote is likely to result in a hung parliament, leaving Italy exposed at a time of financial turmoil.
The case for a snap election rests on the weakness of Italy's current government. Since becoming prime minister in December, Paolo Gentiloni has encountered endless opposition from within his own Democratic Party. Last month, he struggled to cobble together a package of austerity measures worth a mere 3.4 billion euros ($3.8 billion), 0.2 percent of gross domestic product, which the European Commission had demanded to ensure Italy complied with the European Union fiscal rules. He also had to backtrack on a previous government's reform which liberalized occasional work, in order to avoid a confrontation with the unions.
These challenges are tiny relative to what awaits Italy in the fall. The European Central Bank is bound to announce a reduction in its purchases of government bonds, which will prompt investors to demand a higher premium on Italian debt. The Commission will ask for a new round of spending cuts and tax hikes, which will be at least three times as high as the one passed in the spring. The government will also have to deal with a raft of restructurings, ranging from Alitalia, Italy's struggling flag-carrier, to some of the weakest banks. For all of Gentiloni's good intentions, there are serious doubts he will be able to deal effectively with these challenges: The parliamentary term ends in the spring. Lawmakers will be reluctant to support the government on measures that make them unpopular.
It is far from clear, however, that any new prime minister will be able to do a better job than Gentiloni. The electoral law under discussion mirrors Germany's proportional representation system. Since no party is likely to win an outright majority, there would need to be a coalition. The trouble is that, according to the most polls, it is very difficult to imagine a combination of parties that could form anything that resembles a stable government.
The center-left Democratic Party and the center-right Forza Italia appear the most suitable candidates for a “grand coalition,” but they seem set to fall short of winning enough votes and neither have a clear platform yet. The Democratic Party says it wants to continue to cut taxes, but it is not clear where it will find the money. Meanwhile, Forza Italia is toying with the idea of introducing a parallel currency, though it is not clear how that would be compatible with European Treaties. The populist Five Star Movement often talks about a referendum on the euro, albeit it does not explain how it would deal with the inevitable run on the banks that would accompany it. The risk that Italy could end up without a government is high.
Even if Italy gets a new government, it is fanciful to imagine it would take the steps the economy needs. Italy needs to cut day-to-day public spending in order to reduce its enormous debt. It also needs to cut taxes, particularly on labor, and open up its markets for goods and services, in order to attract more foreign investment. Alas, a wobbly government will be unable to take any of these measures, as they would cause a backlash from civil servants and trade unions.
The excitement over a possible snap election is therefore entirely misplaced. Gentiloni should be allowed to do the best he can in these difficult conditions. The political parties could use these months to prepare more credible program ahead of elections in the spring. Italy's politicians need to think less about when they can win power and more about what they would do with it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
To contact the author of this story: Ferdinando Giugliano at fgiugliano@bloomberg.net.
To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.
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