Wednesday, February 27, 2013

Italian election

The Italian election has proven to be a timely reminder that there is still considerable work to be done in the Euro zone and that it will be vulnerable to setbacks from time-to-time. 

The election resulted in a narrow margin in Italy’s lower house for Pier Luigi Bersani’s centre-left coalition, but he failed to win a majority in the Senate.  Bersani is still short of a majority in the Senate even if you include Mario Monti’s party, thanks largely to the strong showing of the “anti-establishment” Five Star Movement.  The Five Star Movement’s strong showing highlighted the strong public backlash against austerity.

Since Mario Monti’s technocrat government came to power in November 2011 progress has been made in strengthening public finances and instituting broader economic reform.  The budget deficit now stands at 2.6% which is not bad by Euro zone standards.  The concern is that further work still needs to be done to turn growing financial stability into stronger economic growth to help make Italy's public debt of 127% of GDP less burdensome.

Of course in the period in which Monti has been doing good work in Italy, the European Central Bank has also pledged to do “whatever it takes” for the Euro to survive.  But remember the Outright Monetary Transactions (OMT) program only comes into play if the individual government’s seeking assistance sign up to budget and structural reform conditions.

It remains to be seen just how big a setback Italy’s inconclusive election outcome will turn out to be.  But as we have seen already since the election, financial markets will treat any setback harshly.  That’s a good discipline.