Here's why the chances of a snap election in Italy are increasing considerably

Key Points
  • Italy could be poised for a general election as soon as September as four major political parties begin talks over new electoral law
  • Former Prime Minister Matteo Renzi suggests synchronizing Italy's vote with the German election in the fall 'makes sense for Europe'
PD Secretary Matteo Renzi attends the 'L'Arena' TV show at Cinecitta Studios on May 14, 2017 in Rome, Italy.

The likelihood of Italy holding a general election by the fall has increased considerably, according to a political risk analyst, as lawmakers moved closer to an agreement on a new electoral system.

"The biggest obstacle to early elections has so far been the lack of a workable electoral law… yet after months of dithering, it seems that the main parties are edging towards an agreement to endorse a German-inspired electoral system, using proportional representation with a 5 percent threshold," Wolfango Piccoli, a political risk analyst at Teneo Intelligence in London, said in an email.

Italy's four main political parties are set to begin discussions on the introduction of a new proportional voting system on Tuesday. The euro zone's third largest economy seems to be in favor of revamping its electoral system in order to mirror the so-called 'German model', whereby a 5 percent cut-off threshold would be introduced for smaller parties.

While an agreement on a new electoral system seems to increase the likelihood of a weak coalition that would struggle to enact domestic reforms, it could trigger snap elections before a tough budget accentuates anti-EU sentiment among Italian voters.

Should Italy's lawmakers reach a deal in June, it would effectively remove the biggest obstacle to the possibility of snap elections.

Piccoli suggested talks between the main parties had raised the prospect of an early election "considerably" and estimated there was now a 45 percent chance Italian voters would be required to return to the ballot box by the fall.

Voting with Germany 'makes sense for Europe'

Michal Fludra | NurPhoto via Getty Images

Former Prime Minister Matteo Renzi argued Italy holding an election in September, at the same time as Germany votes to elect a new premier, would "make sense" from a European perspective.

"Voting with Berlin would make sense for many reasons on a European level, and would allow the new parliament to set five years of economic policy without losing a day," Renzi told Il Messaggero in an interview published on Sunday.

Renzi, having regained the leadership of the center-left Democratic Party (PD) in April, said he would not fight for early elections but described himself as unafraid of the possibility. President Sergio Mattarella is the solitary figure in Italian politics with the power to dissolve parliament and has previously said elections would only be held in the country after a new electoral system had been passed.

"Renzi has apparently given up his preference for a majoritarian electoral law (which, at least on paper, would have yielded greater stability and better governance) in exchange for snap polls," Teneo's Piccoli added.

The Florence born politician, previously dubbed the "demolition man" for his ambitious reformist policies, had stepped down as prime minister in December after a jarring constitutional referendum defeat. In an apparent contrast to his self-titled "modernizer" approach to Italian politics, Renzi warned that even if the four major political parties could agree on a new German-inspired electoral law, the possibility of a coalition in power would be "very risky".

The latest opinion polls put Renzi's PD party neck-and-neck with the anti-establishment Five Star Movement (5SM) party, which has made Italy the biggest risk for the euro zone in the eyes of investors.

Amid reports Rome could be on course to call an early election in September, Italy's 5 and 10-year bond yields fell to their lowest level in five months.