AS FAR as nightmare results go, if you sit in Brussels, Berlin or Frankfurt, the Italian elections could not have delivered a worse outcome.
A fresh dose of uncertainty has been injected into the Eurozone. Although Pier Luigi Bersani, the centre-left coalition leader, won by a slim margin in the lower house, none of the contenders gained a majority in the Senate, the upper house. There are now no obvious coalitions. Since both houses have equal powers, this makes it extremely difficult to govern Italy. Absent some innovative coalition arrangement, Italy may be looking at re-run elections.
The political situation is unusually uncertain, even by Italian standards. With talk of the Eurozone crisis re-emerging, over the last 24 hours Italy’s big mainstream parties have said that new elections should be avoided – so there may be hope for a deal being struck. But what happens next? All eyes are now on Italian President Giorgio Napolitano, who has the unenviable task of rounding up a new government. Formal talks won’t start until after the Italian Parliament reconvenes in mid-March – although party leaders may well reach an agreement before.
There are substantially three options on offer: a national unity government (if Bersani, and former Prime Ministers Silvio Berlusconi and Mario Monti join forces); comedian-cum-politician Beppe Grillo U-turning and agreeing to form a coalition with Bersani’s centre-left alliance; or a re-run election (presumably within three to four months). In other words, expect a roller-coaster ride over the next few weeks. But irrespective of what government emerges, what have Italian voters told us?
Italians voted against all kinds of stuff – corruption, lack of transparency, inefficient bureaucracy – and it would be a mistake to lump the anti-austerity forces together into some generic protest vote. But if you sit in Brussels or Berlin and wanted to see a pro-reform, pro-fiscal discipline government, you have just been dealt two major blows.
First, almost 60 per cent of Italians voted for parties that explicitly oppose austerity, whether EU-mandated or otherwise.
Second, the Five-Star Movement led by Grillo received over 25 per cent of the vote, thanks to innovative, social media campaigning (including recruiting candidates via an online survey). Grillo has been critical of the euro, and called for a referendum on whether Italy should leave the single currency and default on some of its debt. This is the opposite of what Brussels wants.
Meanwhile Monti, the outgoing Prime Minister who led a technocratic, pro-Brussels government over the past year or so, got just over 10 per cent of votes. Grillo’s party will hold roughly twice as many seats in the lower house. Or, put differently: a Yale-educated former European commissioner and adviser to Goldman Sachs was hammered at the polls by a former comedian. This is a major wake-up call for establishment politics in Italy and elsewhere. But the results are also a major blow for the Brussels cash-for-austerity consensus.
Both the hung Senate and the strong anti-austerity vote inject fresh uncertainty into the Eurozone, with markets again set to jump from headline to headline – as so many times before during the crisis – until the dust settles. Whether it is a stalemate, an ineffective “grand coalition” or new elections, economic reforms in Italy will likely be put on hold for a significant period of time.
Italy’s borrowing costs have been rising over recent days, but they remain well below 6 per cent and far from their peak last summer. This probably highlights that intervention by European Central Bank (ECB) president Mario Draghi – via the creation of the as yet untapped outright monetary transactions (OMT) bond-buying programme – may have played a more significant role in bringing interest rates down than reforms pursued by Monti. But a fragmented, anti-austerity Italian parliament could also make it more difficult for the country to tap the ECB’s bond-buying scheme. This is because Italy would need to access the European Stability Mechanism (ESM, the Eurozone’s bailout fund) simultaneously. This would mean a series of strict conditions – which Berlusconi and others could resist – and would require approval from several Northern Eurozone parliaments, including the German Bundestag. Again, this means more uncertainty.
The euro is a supranational currency, governed by 17 national democracies. In the Italian shock results, we have another reminder of just how difficult it will be to pull this one off.
Vincenzo Scarpetta is a political analyst at Open Europe.