The passage of a new electoral law in Italy represents progress in institutional and structural reform that would over the medium term strengthen the sovereign credit profile by reducing political risk to economic and fiscal policy-making, Fitch Ratings says. But for the moment economic reform will remain partly dependent on political manoeuvring.Italy’s parliament approved the new electoral law on 4 May. It aims to increase political stability, for example by guaranteeing winning parties (rather than coalitions) a majority in the lower house, via a run-off vote if necessary. If signed by President Sergio Mattarella, it will take effect in July 2016.Electoral reform should indirectly support Italy’s sovereign credit profile by reducing the risk that bouts of political volatility lessen governments’ durability and their capacity for structural reform. But its effectiveness largely depends on the proposed constitutional reform, which would redefine the relationship between the lower and upper houses. Plans to reduce the latter’s size and power would end the “perfect bicameralism” that has often resulted in legislative deadlocks. Constitutional change is a lengthy process requiring multiple parliamentary votes and possibly a referendum.The near-term risk of renewed political turmoil has been kept in check since Matteo Renzi became prime minister in February 2014. The existing bonus system means that Renzi’s Partito Democratico (PD)-led coalition has a majority in the lower house (the Chamber of Deputies). His high popularity ratings have enabled him to use the possibility of fresh elections to push measures through parliament, including electoral reform. Nevertheless, political risk could rise if Renzi’s popularity fell, and intra-party splits are possible – some PD members voted against electoral reform.The government has continued to pursue structural macroeconomic reforms. The Jobs Act came into force in March and could boost labour market flexibility and increase Italy’s weak growth potential.Recent data suggest that Italy will finally exit its deep recession this year. The prospect of a modest cyclical pick-up and its favourable impact on public finances supported our decision to affirm Italy’s ‘BBB+’/Stable sovereign rating last month.
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