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Tuesday, February 26, 2013

The Italian Election

It was interesting to me that in what most people would view as an important election, the turnout was actually lower than elections in 2008. For instance, the AFP (via Google News) reported:
Italy on Monday was winding up landmark elections watched warily by eurozone neighbours fearful that no clear winner will emerge, while a lacklustre turnout reflected widespread frustration among voters fed up with austerity cuts and a grinding recession.
Sunday, the first of a two-day vote, saw a sharp drop in turnout of seven percentage points compared with the last elections in 2008, standing at 55 percent going into Monday's polling.
"Italy turns its back on politics, deserts the ballot boxes, and this is how it registers its protest," wrote the left-wing daily Il Fatto Quotidiano.
Leading daily Corriere della Sera said the low turnout reflected an "acute disorientation" in the electorate, fed up with biting austerity measures and facing a "crisis with no end in sight".
(See also this DW report and this story from Euro News). Unfortunately, I have not been able to find any information on which portion of the population turned out in lower numbers. So, was it "acute disorientation," voter "protest," or simply that, as in the United States, a large bloc of voters no longer feel that there are any parties that represent them?

In any event, the primary focus in the media has been on what the election portends. The Washington Post reports:
Italian voters delivered a stinging rebuke to the nation’s political class and to the painful economic austerity measures meant to bring down the crushing debt in the euro zone’s third-largest economy. With no single political force winning a clear path to a majority in both of Parliament’s chambers, politicians in Rome began arduous talks to form a government. Most scenarios were viewed as leading to a weak coalition vulnerable to a quick fall.
... Concern was fueled by the likelihood of a political vacuum in Italy for some time to come. The Five Star Movement of comedian turned politician Beppe Grillo, who has called for a referendum on Italy’s membership in the euro zone and a renegotiation of its debt, bested all predictions by landing 25.55 percent of the vote. The center-left party of Pier Luigi Bersani polled substantially lower than expected, securing enough votes for a majority in the lower house but failing to gain a majority in the Senate.
Meanwhile, the center-right coalition of former playboy prime minister Silvio Berlusconi — under whom Italy became entangled in a deep financial crisis — did far better than expected. Voters apparently were responding to his promise to roll back harsh austerity measures, which have been seen as restoring investor faith in the country at the price of sending it into a recession with no end in sight.
The last-minute coalition put together by Mario Monti, the former interim prime minister and architect of the Italian austerity program, came in a distant fourth.
The Guardian similarly noted:
Three years of German-led austerity and budget cuts aimed at saving the euro and retooling the European economy was left facing one of its biggest challenges as Italian voters' rejection of spending cuts and tax rises opened up a stark new fissure in European politics.

The governing stalemate in Rome and the vote in the general election – by a factor of three to two – against the austerity policies pursued by Italy's humiliated caretaker prime minister, Mario Monti, meant that the spending cuts and tax rises dictated by the eurozone would grind to a halt, risking a re-eruption of the euro crisis after six months of relative stability.
Businessweek, likewise:
For three years, euro-zone governments have managed to dodge the blows of political opponents trying to derail their efforts to maintain fiscal austerity.
Their foes have finally landed a solid punch. Voting in parliamentary elections on Feb. 24 and 25, recession-fatigued Italians threw their government into disarray by rallying behind politicians who promised to reverse the austerity program of outgoing Prime Minister Mario Monti. The top-polling party, led by former comedian Beppe Grillo, promised not only to roll back Monti’s efforts but also to hold a referendum on Italy’s membership in the euro currency bloc. The vote left Parliament effectively deadlocked, which may lead to new elections.
The vote “is not just a kick in the teeth for Mr. Monti,” says Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “It’s also one for Berlin, Brussels, and Frankfurt.” The euro zone’s crisis-fighting effort has been spearheaded by the German government, the European Union, and the European Central Bank.
 In other words, the Euro crises continues.

The financial markets didn't react too well to the news. The Washington Post article cited above explained:
The vote, held Sunday and Monday, underscored the still-volatile nature of Europe’s debt crisis. Economists said the chaotic political outlook in Italy raised the prospect that deeper economic turmoil would again take root.
“We believe the likelihood of Italy entering a financial assistance program has increased as a result of the electoral outcome,” Citibank’s London research arm said Tuesday in an investment note.
The key index in Milan fell by 4.4 percent in midday trading Tuesday, with bank stocks particularly feeling the pain. Italian borrowing costs jumped to three-month highs, and those of other troubled European economies, including Spain and Portugal, also spiked.
Across the continent, market sentiment turned negative. London’s FTSE 100 fell 1.28 percent, the Paris CAC 40 dropped more than 2 percent, and the key index in Frankfurt was off by more than 1.8 percent. The declines followed drops overnight in Tokyo and Hong Kong. At the same time, investors drove up the price of safe-haven gold and pushed down oil prices on fears of lower economic growth.
 The Businessweek article reported:
Investors are clearly uneasy. As markets opened today, credit-default swaps on Italian bonds jumped to their highest level since 2011. Spanish and Portuguese bonds also slumped, reflecting fears that political turmoil could spread to other sickly economies. By most measures Spain is a lot worse off than Italy, with unemployment at 26 percent and the economy mired in recession.
 The Guardian article noted:
Fears that the deadlock will lengthen Italy's near two-year recession and spill over into the rest of the eurozone hit markets across Europe. The Italian banking sector fell 7% in value, dragging the main MIB stock market index 4% lower.

The market turmoil in Milan spread to Germany, France and the UK, with domestic banks among the biggest fallers. Deutsche Bank saw almost 5% knocked off its value, while Barclays suffered a 4% decline. The FTSE 100 fell 1.4%. The German Dax slumped more than 2% and the Paris Cac was down 2.75%.
 Reuters also reported:
The focus will now be on an Italian treasury bill auction on Tuesday when borrowing costs could rise given the uncertainty over the election result, he said.
The euro was trading at $1.3058, hovering near a more than six-week low against the dollar of $1.3047 touched on Monday on jitters about political gridlock in Italy hampering the country's efforts to reform and slash its debts.
The yen at one point on Monday soared over 3 percent against the euro and 2 percent against the dollar. The yen's recent steep losses on bets of aggressive reflationary monetary policy in Japan have made it vulnerable to sharp reversals.
On Monday the yen rose to a three-week high of 90.85 yen from its intraday low of 94.77 touched earlier in the day, its lowest since May 2010. The yen also surged to 118.74 against the euro from its day's low of 125.36.
The yen was trading at 92.13 early on Tuesday against the dollar and at 120.32 against the euro.
In other words, Italians are tired of paying the piper, and want Germany to pick up the bill. This is going to create additional tension within the EU. I don't expect Italy to voluntarily leave the Euro if Germany is going to continue funding bailouts. So, the result will be that Germany will have to take steps to force Italy to continue with an austerity program, disentangle itself, or choose to subsidize Italy.

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