LONDON (Reuters Breakingviews) - Italy's next prime minister is a five star gift for populists. Paolo Gentiloni has to fix the banks, sort out voting rules and steer the country to elections. A replacement for Matteo Renzi is better than a vacuum. But given Gentiloni is from the same europhile Democratic Party, doing too good a job might increase the chances of the populist, eurosceptic 5-Star Movement taking power.
Banks are the most pressing issue. After the European Central Bank ordered Monte dei Paschi on Dec. 9 to stick to a requirement to raise 5 billion euros of capital by year-end, MPS said late on Sunday it would soldier on with an increasingly forlorn attempt to do so via private means. The only significant tweak to this long-held plan is for retail investors holding 2.1 billion euros of debt to potentially be part of the mix.
Gentiloni's simplest solution is to make this happen, but it could fuel support for the 5-Star Movement, which wants a referendum on the euro. A bailout using public money, or even too good a compensation deal for retail investors, could undermine European state-aid rules.
More complex is the voting law, which needs tweaking before elections scheduled for 2018. Renzi's referendum meant to abolish the upper house as an elected body, but its failure means the two houses have different rules. The simplest solution is to extend the rules for the lower house - a double ballot system that hands power to a single party - to the upper house.
The fear is that may also increase the chances of the 5-Star getting in, because they are one of the two largest parties in the polls. The alternative is creating a system that rewards coalitions. That may appeal to both Gentiloni's party and Silvio Berlusconi's Forza Italia, yet may not be a recipe for strong government. It may also end up boosting the 5-Star Movement if seen as a stitch-up to block them.
The last task is keeping the show on the road until elections. Renzi would probably like a vote as soon as possible next year. Yet Gentiloni's government may drag on, particularly if parties bicker over the electoral law, and herald another year of weak growth. Italy's fourth unelected leader in a row has no mandate for reforms. If the European Commission asks Italy to rein in its deficit, anti-Europe sentiment will soar, and so will 5-Star's already-high popularity.