Italy is next political risk in Europe

Italy's next electionsItaly's next elections

Italian elections are likely to represent the next main European political risk. With anti-establishment sentiment running high and the euro increasingly seen as a major contributor to Italy’s structural problems, both themes will feature prominently in the campaign ahead of the next election. M5S is likely to become the largest party in parliament, irrespective of the timing of the election. This means euro break-up risk is likely to remain alive, despite the relatively benign political outcomes in the Netherlands and probably in France and Germany that have
formed our European political base case for 2017.
Yet, in the view of Citi’s analysts:

A broadly PR electoral system, towards which Italy seems to be moving after 25 years of a majoritarian/PR mix, will likely reduce risks of extreme outcomes – such as a referendum on the euro or an outright parliamentary decision to leave the single currency – even if M5S is in government (a euro referendum is unlikely even if M5S musters a majority in one of the two Houses).

On the other hand, a PR system is likely to deliver weaker and shorter-lived governments compared to the past 25 years. The ability and willingness to reform is likely to be impaired  further, causing debt sustainability concerns to resurface eventually. Experts at the house conclude:

It may have to take another economic crisis for the country to seriously return to its reform agenda.