Why Much Is at Stake in Italy's March 4 Elections: QuickTake Q&A

(Bloomberg) -- Italy’s all-too-familiar postwar brew of government dysfunction, economic stagnation and toxic debt has investors worried again, even as the specter of populist revolt recedes elsewhere in Europe. The next parliamentary elections in the euro region’s third-biggest economy, now scheduled for March 4, will test stress points including the country’s ambivalent relationship with the single currency, its towering debt and a troubled banking system still trying to dispose of decade-old poisonous holdings.

1. What will the vote decide?

It will be a crucial test for the anti-establishment, euroskeptic Five Star Movement, especially since a new electoral law encourages parties to build alliances. Five Star is challenging the ruling center-left Democratic Party of Prime Minister Paolo Gentiloni. So is a possible center-right coalition of the Forza Italia party of ex-premier Silvio Berlusconi, the euroskeptic and anti-migrant Northern League and the small, far-right Brothers of Italy; that bloc won regional elections in Sicily in November. But polls have shown that none of these three groups may have the support to win a parliamentary majority on its own. So the elections could end up with a hung parliament, lingering uncertainty, and a reappointment of Gentiloni until fresh elections.

2. What role might the new electoral law play?

It gives a green light for parties to fight for seats as coalitions, a step that Five Star has ruled out. Five Star lawmaker Alessandro Di Battista denounced the law as “an institutional coup d’etat.”

3. How are markets taking the news?

Tension is building, with yield on 10-year government bonds, known as BTP, rising above 2 percent for the first time since Oct. 26. Markets are concerned not just by the prospect of a hung parliament, but also by Five Star’s inexperience at the national level and a possible referendum on Italy’s membership of the euro area. Five Star’s program for government includes overhauling banks and breaking up the European Stability Mechanism and the troika that oversaw bailouts from Greece to Ireland. Add to that worries about how Italy could suffer from an end to the European Central Bank’s quantitative easing program.

4. How likely is it that Italy would abandon the euro?

Both Five Star and the League have softened their opposition to the euro as Italy overcomes the longest recession in the nation’s history. Luigi Di Maio, 31, Five Star’s candidate for the premiership, has called a referendum on Italian membership of the euro area “a last resort” to force reforms of the European Union. But pulling Italy out of the euro would require cross-party political backing as well as a tortuous legislative process. A constitutional amendment would be necessary even before calling a referendum.

5. How serious is Italy’s debt problem?

At more than 130 percent of gross domestic product, Italy’s debt is second-highest in the euro area, after Greece. The European Commission called the debt "a major source of vulnerability" for Italy and has been overseeing the country’s efforts to reduce spending. An election victory by Five Star, in addition to raising questions about Italy’s euro membership, would fuel doubts over the sustainability of the country’s debt.

6. How unhealthy is Italy’s banking system?

Government measures on Monte Paschi and the two Veneto banks have defused a big source of financial and political stress in the euro zone for the last two years. But the underlying problems remain, including cronyism with many lenders too entwined with politicians, unions and foundations of all shapes and sizes. The losses inflicted on savers will likely feature heavily in the election campaign, with controversy fueled by a parliamentary investigation into the sector’s woes.

7. So who is likely to rule Italy next?

If Five Star comes out on top, President Sergio Mattarella could give its candidate -- Di Maio, the deputy-speaker of the lower house -- an exploratory mandate to try to form a government. Five Star would have a hard time finding allies, although League leader Matteo Salvini has made overtures to it. One scenario is a “grand coalition” with the Democratic Party and Berlusconi’s Forza Italia. Just who would lead such a coalition is anybody’s guess. Democratic Party leader and ex-premier Matteo Renzi, who toured Italy by train for two months, is under attack inside his party and seeking to smooth relations with the rest of the center-left. Berlusconi is vying with Salvini for leadership of the center-right and is banned from running for office after a 2013 tax-fraud conviction. Perhaps premier Gentiloni will serve again.

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