Photographer: Alessia Pierdomenico/Bloomberg

What You Need to Know About Italy’s March 4 Election

Italy’s all-too-familiar postwar brew of government dysfunction, economic stagnation and toxic debt has an added pinch of populism as an important national vote nears. Parliamentary elections in the euro region’s third-biggest economy on 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. Even as the specter of populist revolt recedes elsewhere in Europe, Italy’s anti-establishment, euroskeptic Five Star Movement is seeking a breakthrough.

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1. What are the major parties in the race?

Five Star is challenging the ruling center-left Democratic Party of Prime Minister Paolo Gentiloni. Also in the mix is a four-party center-right coalition spearheaded by ex-premier Silvio Berlusconi that won regional elections in Sicily in November. If none of these groups has the support to win a majority on its own, the elections could end up with a hung parliament, lingering uncertainty, and a Gentiloni staying on as caretaker until fresh elections. A new electoral law that encourages parties to build alliances will challenge the go-it-alone nature of Five Star.

2. How does the electoral law factor in?

It gives a green light for parties to fight for seats as coalitions, a step Five Star has ruled out. That leaves the populists at a disadvantage -- and explains their protests against the law.

3. What might the election result be?

Polls published before the start of a blackout period on Feb. 17 suggested Five Star was on course to become the single biggest party but would trail the Berlusconi coalition. After the vote, much will depend on President Sergio Mattarella, whose role is to grant an exploratory mandate to the figure he believes could secure a majority. Even if it wins the most seats, Five Star would have a hard time finding allies. That’s why its candidate for prime minister, 31-year-old Luigi Di Maio, is seen as a longshot.

4. If not Five Star, who might rule Italy next?

One scenario is a “grand coalition” built around 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 is under attack inside his party and seeking to smooth relations with the rest of the center-left. Berlusconi is vying with Northern League leader Matteo Salvini for leadership of the center-right and is banned from running for office anyway after a 2013 tax-fraud conviction. Perhaps premier Gentiloni will serve again.

5. How are markets following the vote?

With interest and attention, but no sign of panic as of yet. The yield on 10-year government bonds has been hovering around 2 percent all year, far below its 2011 peak of more than 7 percent. Market concerns include the prospect of a hung parliament, Five Star’s inexperience at the national level and its call for an overhaul of the banking industry. And no one has forgotten its past talk of a referendum on leaving the euro.

6. Might Italy really abandon the euro?

There’s not much chance of that really. Both Five Star and the Northern League have softened their opposition to the euro as Italy overcomes the longest recession in the nation’s history. Plus, pulling Italy out would require cross-party political backing through a tortuous legislative process, and a constitutional amendment before any referendum could be held. No party has made this process central to its agenda.

7. 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 would fuel doubts over its sustainability.

8. 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.

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