Political Deadlock In Italy Brings Europe Back To The Brink
Italy’s electoral earthquake has rocked the foundations of the euro zone, plunging financial markets into turmoil and reigniting fears for the European currency’s survival.
Well over half of the Italian electorate voted for former Prime Minister Silvio Berlusconi or the anti-establishment comic Beppe Grillo in the election held Sunday and Monday. Both campaigned to scrap austerity and economic reforms viewed as essential by European Union headquarters, world financial markets and the German government.
A manslaughter conviction from a car accident in the 1980s bars Grillo from holding office and 76-year-old Berlusconi is unlikely to return to the prime minister’s palace. But whoever leads the new government will have to depend on one or the other to get legislation passed through the deeply divided parliament.
That has people worried across Europe.
“Italy still needs to continue solid policies of reform and [budget] consolidation,” Germany‘s Foreign Minister Guido Westerwelle said in Berlin. “In the face of the debt crisis, we in Europe are all in the same boat… it’s important that everybody knows their responsibility.”
Germany’s tabloid newspaper Bild put matters more bluntly. “Are they going to make our euro Kaput?” the paper asked over a picture of Berlusconi and Grillo.
Stock markets across Europe and beyond tumbled on the results from Rome.
Milan’s FTSE MIB index was down 4.5 percent in morning trading Tuesday, with regulators suspending some bank trades as they plummeted more than 10 percent. The euro slumped against the dollar and yen and, crucially, interest rates were rising sharply on Italian bonds.
“I’m more and more pessimistic by the hour,” said Carsten Brzeski, senior economist at ING bank.
“For Europe it’s obviously bad,” he said in an interview. “It’s another eye-opener that the crisis is far from being over. Uncertainty in markets has returned and will stay, I don’t see a quick exit from this.”
The interest-rate question is crucial for Italy. The country’s $2.6 trillion public debt represents 127 percent of its economic output, Europe’s second-highest rate after Greece.
Languishing in a double-dip recession and with stagnant growth for more than a decade, Italy has little chance of reducing that debt unless it can revive the economy.
The political deadlock will increase investor fears that Italy won’t be able to make its debt payments, pushing up interest rates the country will find it increasingly hard to pay. When that kind of vicious circle took place in Greece, it triggered the euro crisis.
A combination of reforms introduced by Italy’s technocratic government under Mario Monti and EU measures to provide a financial backstop calmed the markets last year. But Monti was trounced in the election, scoring just 10 percent, and the EU support funds aren’t large enough to save the world’s eighth largest economy.
“We are back in the storm,” says Marco Incerti of the Center for European Policy Studies think-tank. “All of the doomsday scenarios that we thought we had done away with have come back and become a possibility again.”
Berlusconi brushed off the debt fears as an “invention” Tuesday, saying Italians had “lived happily” with higher interest rates than Germany for years. “The markets can go on their own way, they are independent, and a bit crazy,” he said in radio interview.
However, Italy will face a major test Wednesday, when it must sell $8.5 billion in bonds amid its sharply rising rates. Concern over Italy was also spreading fast to other vulnerable euro zone economies. Spain saw a significant jump in its interest rates and the Madrid stock exchange fell almost 3 percent in morning trading.
Spain’s Foreign Minister Jose Manuel Garcia-Margallo expressed “extraordinary concern” about the risk of contagion from Italy, saying voters there had made “leap in the dark that does not bode well for Italy or for Spain.”
The man most likely to be tasked with sorting out Italy’s political mess is Democratic Party leader Pier Luigi Bersani, whose center-left coalition squeaked by to win most votes.
He will have a comfortable majority in the lower house of parliament, thanks to an electoral system that awards extra seats to the winning coalition: 340 seats, compared to 124 for Berlusconi, 108 for Grillo and 45 for Monti.
There’s no clear majority in the Senate, however. Bersani is expected to get 120 seats; Berlusconi 117; Grillo 54; and Monti 18.
Since Grillo has long rejected any alliance between his Five Star Movement and the traditional parties, speculation is focused on the possibility Bersani will build a “grand coalition” government with Berlusconi’s People of Freedom Party.
However, divisions run deep and many fear such a broad coalition would be unworkable for more than a few months. “Italy ungovernable,” read Tuesday’s front page of the daily La Repubblica.
Alternatives could include another technocratic administration that tries to muster broad support under a non-political figure similar to Monti, whose government has run the country since Berlusconi stepped down in Nov. 2011.
There’s also speculation Italy could follow the example of Greece last May, when an election produced a hung parliament and a huge protest vote for anti-austerity parties on the far left and far right. After weeks of stalemate — and warnings of dire economic woes from markets and international creditors — a second election produced a stable government that has been able to implement reforms.
However, few would want to risk another vote with no guarantee of a stable outcome.
Concern over the Italian result has been particularly acute among Germans, who have long viewed the specter of instability and lax finances in Italy as a threat to the entire euro currency. Voters in Germany go to the polls in September with the main architect of Europe’s austerity policies, Chancellor Angela Merkel, riding high in the polls.
The German press was packed with headlines about how Italian voters have been duped by populist politicians offering unrealistic, easy solutions to the crisis. “Populism, yelling and lies, rule there,” said a headline in the center-left Suddeutsche Zeitung. “Italy in the theater of illusions,” added the conservative Die Welt.
This article originally was published in Global Post.
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