Can the Italians be serious? That is likely to be the reaction of
financial markets and the country’s euro zone partners as they ponder a
disastrous election result, which could reignite the euro crisis. More
than half of those who voted chose one of two comedians: Beppe Grillo,
who really is a stand-up comic; and Silvio Berlusconi, who drove Italy
to the edge of the abyss when he was last prime minister in 2011. Both
are anti-euro populists.
This comedy could easily end in tragedy. The inconclusive result has
echoes of last year’s first Greek election – except that Italy is bigger
and more strategic. The country faces political paralysis, while its
economy is shrinking and its debt is rising. The European Commission
forecast last week that GDP would fall a further 1 percent this year
after last’s year 2.2 percent drop. Debt, meanwhile, would reach 128
percent of GDP by the end of this year.
The euro crisis went into remission after the European Central Bank’s
president Mario Draghi promised last summer to do “whatever it takes”
to preserve the single currency. But, if Italy proves ungovernable
during this critical time, even the ECB’s safety net may not work.
Investors are already getting nervous. Italian 10-year bond yields
jumped 0.4 percentage points to 4.7 percent on Tuesday morning. Spanish
yields also rose 0.2 percentage points to 5.3 percent, in the first sign
of contagion. These are, though, admittedly still a far cry from the 7
percent-plus yields when the crisis was raging last July.
The risk is not that Berlusconi or Grillo will be prime minister. It
is rather than nobody will be able to form a stable government. The
electorate split into three roughly equal groups: Berlusconi’s
centre-right group, Grillo’s uncategorisable 5-Star Movement and the
centre-left coalition led by Pier Luigi Bersani. The centrist coalition
led by Mario Monti, the technocratic who saved Italy from Berlusconi’s
antics but whose austerity policies were deeply unpopular, came a poor
fourth.
Italy’s convoluted electoral system gives the coalition with the
largest number of votes an automatic majority in the lower house of
parliament. This means Bersani will get the first chance to be prime
minister, even though his coalition beat Berlusconi’s only by a whisker.
However, a different electoral system in the Senate, which has equal
power as the lower house, means nobody will have a majority there.
Bersani will not even be able to form a government in alliance with
Monti – a scenario which pre-election polls had suggested was a likely
outcome. At least Greece has only one house of parliament.
So what happens next? One idea is that Bersani could team up with
Berlusconi to form a new grand coalition. This, though, seems unlikely
given how they stand for completely opposite policies – unless Italy is
dragged right to the brink. It’s also hard to see who would run such a
government. If Monti hadn’t made the terrible mistake of running in the
election, he would have been the natural choice. But his credibility has
been shot to bits.
Grillo has said he won’t form a coalition with anybody, so a formal
alliance with him isn’t an option. But Bersani could conceivably try to
govern on his own, getting support on a case-by-case basis from the
comedian. That, though, would be a recipe for extremely weak government.
Another option is a fresh election, as there was in Greece last year.
Indeed, it’s hard to see how a new ballot can be avoided. The snag is
that it isn’t obvious this would resolve the deadlock given that there
are three roughly equal forces which don’t want to work together.
Some pundits think a solution could be to change the electoral
system. That could conceivably clear away the old political caste,
preparing the way for new parties and new leaders such as Matteo Renzi,
the young centrist mayor of Florence. But Italy’s parliament has been
debating new voting rules for years without coming to a conclusion and
it may find it tough to reach consensus now.
Meanwhile, investors will give their verdict. A key question is
whether Italy can still rely on the ECB’s support – its promise to buy
potentially unlimited quantities of sovereign bonds. While this a very
powerful drug, it contains important fine print: the ECB will only
engage in so-called “outright monetary transactions” if the country
concerned agrees to a reform programme with its euro zone partners.
It is hard to see Italy being able to sign such a programme without a
stable government – which means the safety net has holes in it. If
investors start thinking this way, bond yields could spiral upwards and
capital flight could resume. The prospect of crisis could become a
self-fulfilling prophecy.
Contagion could return with a vengeance too. Other countries may have
more stable governments than Italy. But Spain, Greece and even France
share its problems of a shrinking economy, rising debt and increasing
popular anger against austerity. The longer recession bites, the greater
the appeal of populist policies. Investors may worry anew that the race
between populism and the return of growth will be lost across the euro
zone.
A market fright could, of course, restore Italian voters to their
senses when and if there’s a second election. That is what happened in
Greece last year. But the next few months could be extremely jumpy and a
happy outcome is not sure.
Contact Us:
Asad Rasheed
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Direct : 04-3841906
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Here is another blog that provides regular news and information and is very useful to stay updated on the markets... http://century-financial-brokers-uae.blogspot.ae/
News Source: www.reuters.com
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