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Rejecting Austerity, Italians Rekindle Euro Jitters

Author: Charles A. Kupchan, Whitney Shepardson Senior Fellow
February 27, 2013

Rejecting Austerity, Italians Rekindle Euro Jitters - rejecting-austerity-italians-rekindle-euro-jitters

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The outcome of the Italian elections has left a cloud of uncertainty over Italy--and over the eurozone. The center-left won a majority in the lower house, but fell short in the Senate, leaving no party in a position to form a stable government.

Polling data initially predicated a different outcome: a governing coalition of the Democratic Party, led by Pier Luigi Bersani, and Civic Choice, led by outgoing prime minister Mario Monti. This result would have helped consolidate the long-missing center in Italian politics and produced a government likely to have advanced the agenda of economic reform put in place by the outgoing technocratic team led by Monti.

But widespread voter disaffection, fueled in part by Monti's tax increases, boosted the fortunes of a populist protest party led by Beppe Grillo, a former comedian. Grillo's frontal assault on Italy's political establishment clearly paid off. Swelling voter discontent also produced a better-than-expected showing for the People of Liberty Party led by former prime minister Silvio Berlusconi, who has been critical of the austerity program introduced by Monti.

Rather than consolidating the center, the vote has led to a fragmented political landscape and a period of potential political paralysis. Bersani and Berlusconi could fashion a grand coalition, but a teaming up of their two parties is likely to prove ineffective and short-lived. Monti's poor showing in the election might also give this coalition reason to stray from the path of economic reform. In the absence of the formation of a new government, Italians would head back to the polls in the next few months. But the protest vote might well strengthen over time, risking that a new vote produces even greater political turmoil.

The financial markets have already responded negatively to the elections, weighing down stock prices around the world and driving up Italy's borrowing costs. Should a functioning government fail to emerge and Italy fall off the more disciplined fiscal path that helped stabilize Europe's debt crisis, the eurozone could slide backward and again be engulfed in expensive and controversial bailouts to avert financial crisis. And with Germany headed into its own election season, Chancellor Angela Merkel will be treading very carefully when it comes to putting German taxpayers on the line.

This turn of events comes at a particularly inopportune moment. With the U.S. economy on the cusp of major budget cuts due to the implementation of sequestration, economies on both sides of the Atlantic could slow and have to cope with jittery firms and financial markets.

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