News Analysis: Italy at crossroads -- new gov't or early elections

Italy is at a crossroads as outgoing Prime Minister Matteo Renzi, who decided to resign following a crushing defeat in a referendum on his constitutional reform law, is set to offer two alternatives.

The two choices are either forming a broad coalition government to finish pending reforms, or pushing for early elections to be held before the current legislature ends in 2018.

In the referendum on Sunday, nearly 60 percent of voters rejected Renzi's constitutional reform law concerning Italy's law-making process, parliament composition, and balance of power between the central government and the regions.

The major constitutional amendment proposed in the referendum was to cut the size of the senate to 100 from 315 seats, and strip it of the power to bring down the cabinet with no-confidence sessions, and vote on national legislation. Currently, draft bills have to be approved by both houses in an identical text in order to become law.

Renzi's center-left Democratic Party (PD) has said it is not inclined to remain alone at the helm, which could draw criticism from the opposition accusing the party of wanting to hang on to power at all costs.

Renzi announced his resignation at midnight Sunday, but has since agreed on the call of President Sergio Mattarella -- whose job is to consult with all sides and then designate a new prime minister to form a government -- to remain in post until the 2017 budget bill is approved.

The country's budget has to be approved by the end of 2016, and still lacks the green light from the senate. The upper house's final vote on the 2017 draft budget will likely happen on Wednesday.

However, the PD, as Italy's largest party, still holds a majority in parliament, and Mattarella said the PD has a responsibility to remain at the helm while he opens consultations with all sides -- a process he will begin on Thursday.

Analysts say that in case of a broad coalition government, Mattarella's choice of prime minister could fall on Senate Speaker Pietro Grasso, a former anti-mafia magistrate from the PD but seen as being distant enough from Renzi to be able to lead a government backed by several different parties.

Others mooted for the prime minister's post -- Transport Minister Graziano Delrio, Foreign Minister Paolo Gentiloni and Economy Minister Pier Carlo Padoan -- are all Renzi's loyalists.

The opposition populist Five-Star Movement (M5S), currently Italy's second-largest party after the PD, is clamoring for early elections while former Prime Minister Silvio Berlusconi's center-right Forza Italia party is calling for a vote after the current electoral law is amended.

The current electoral law assigns a bonus to parties or coalitions that win some 40 percent of the vote, allotting them 54 percent of the seats to ensure the winner has a stable majority.

The law only applies to the 630-member lower house but not to the 315-seat senate, because the government planned to do away with the senate and replace it with a smaller body of regionally elected representatives.

This required amending an article of the constitution, a move that was rejected by Sunday's referendum.

An appeal is currently pending before the Constitutional Court, which announced Tuesday it will hold a hearing on the electoral law on Jan. 24.

Elections will not be held until after that ruling, because Mattarella has made it very clear he is disinclined to dissolve the parliament until both houses have compatible electoral laws. Endi