When your own nation’s major newspaper tells you your country is ungovernable, things are at a pretty dire place.
That’s what happened in Italy after the latest election, which resulted in scant prospects that any faction will actually be able to achieve a working majority in the Senate. Long story short, it seems a stable government is a pipe dream in Italy right now.
It looked like the center-left Democratic Party was well on its way toward securing such a majority—but that didn’t work out.
Infamous former Prime Minister and raconteur Silvio Berlusconi seemed, at one point, an also-ran. Then he stormed back with his talk against austerity measures, promoting tax cuts and returning paid taxes to the people. It was an alluring line, and it worked on a nation full of people affected by Euro-wide austerity measures.
The new citizens’ protest network—the Five Star Movement—led by a comedian, of all things, emerged first on the Internet and then went on to win a quarter of the electoral votes. But, given its admixture of populist rhetoric and political naiveté, it is hardly worth discussing which way things may go.
We could see the whole election scrapped, resulting in a do-over. Or an extremely unlikely coalition government may form which, hopefully, could redress Italy’s existing voting laws, as the BBC News suggests.
The Democratic Party may well do some soul-searching, akin to what befell the Republicans here in the U.S. after President Obama’s smooth return to the White House.
In any case, the fractious election results certainly affected the market; Italian stocks and government bonds dropped like a rock yesterday. Shares on the main index fell 4 percent, while banks like Intesa Sanpaolo and UniCredit lost 7 percent or more.
Italy presently has more than $2.6 trillion in state debt. Short-selling had to be temporarily banned in Intesa and the smaller bank Carige by the national regulator. Reuters quotes a Citi analysis of the situation:
"(The) Italian election is the pivotal political event for the euro zone this year, and has produced divided government in an outcome negative for political stability.”
“The high political uncertainty that is likely to persist in the coming period will likely have a negative impact on real and financial investment decisions in Italy."
Today, Rome will open up the market to 6.5 billion euros of 5 and 10-year bonds, which aren’t covered by the European Central Bank’s 3-year safety clause. That will likely see foreign investors shy away.
Even Paris and Frankfurt dipped slightly on the news from Italy. Altogether, the euro dropped to its lowest in seven weeks versus the dollar. The surprising victory of anti-austerity rhetoric dealt a sharp rebuff to the austerity rhetoric being chanted across the Eurozone currently.
That, of course, resulted in EU leaders advising all the major Italian factions that the best way out is to form a coalition government that will focus on austerity measures promptly. EU President Herman Van Rompuy’s statement, quoted by Bloomberg, is emblematic of the rhetoric directed toward Italy now:
“Every time we turn a corner, we must keep in mind that just around that corner lies the danger of complacency,” Van Rompuy told Estonia’s parliament yesterday. “There is no way back. And this we simply cannot afford.”
In addition to France and Germany, Spain and Portugal also saw sell-offs, and investors moved off money from Spain, Portugal, Greece, and Italy into Germany. Ten-year Italian yields went up by the most in 14 months, while the risk premium against German debt went up 51 basis points.
The situation is made much more precarious by the comedian-politician Beppe Grillo flatly refusing to consider austerity and instead demanding a referendum on the euro itself.
Bloomberg quotes the Foreign Minister of Luxembourg, Jean Asselborn:
“This is a catastrophe for Europe. Italy won’t get out of this financial and economic crisis without a serious plan. This won’t happen with populism or by misrepresenting things. It can only work by tackling this problem in a serious manner and creating confidence again.”
Germany, of course, is the 800-pound gorilla in the room. Since 2009, voters across Greece, Spain, Ireland, and Portugal have constructed governments that mirror Germany’s austerity measures, buying into the deficit-control/euro-safety argument. But if people begin to equate the euro with mass unemployment, then the stability of the EU itself is at risk.
This year, unemployment will reach 11.6 percent in Italy, 17.3 percent in Portugal, 26.9 percent in Spain, and 27 percent in Greece. These are unsustainable numbers, and Italy has just pushed everything closer to an edge that is as yet invisible.