Citi On The Italian Elections - Business Insider

It seems like ages ago that the Italian election result caused markets to spasm and volatility to surge.

In fact, it was just on Monday, and by the end of the week, the event had largely been forgotten by the global markets (although Italian markets continue to underperform, as headlines reveal the difficulty the parties will have going forward in their attempt to form a government).

But it would be a mistake to think the significance of the elections is just old news.

To recap what happened: The big "winner" of the election was Beppe Grillo, the populist, anti-bank comedian, who took nearly 25% of the vote. Between him and Berlusconi, anti-austerity forces took over 50% (!) of the vote. Since the current stability in Europe is premised on a bargain whereby the ECB promises to backstop government bond markets in exchange for austerity, this massive rejection of austerity is a shot straight to the heart of how Europe has managed to calm its crisis.

In a note published after the election, Citi's Tina M. Fordham wrote ominously:

The outcome also reflects the collision between two macro trends we have long warned of: the rise of anti-establishment sentiment and the increased skepticism towards European obligations in the midst of a slow-growth or no-growth economic situation. The subsequent political gridlock will raise concerns both in markets and among European political leaders, with Italy's prospects for fiscal consolidation and economic growth diminished. It also marks the end to a two year electoral trend of majority victories by mainstream opposition parties.

These sentiments are echoed by a great piece in the FT by Mark Mazower (via Krugman) which warns that between austerity and aloof technocrats, Italy has exposed a crisis of democracy, which only seems to be getting worse in Europe.

The response from Brussels and the creditor north to all this has been robotically unimaginative ? to insist that the debtors, like the little fish in Finding Nemo, must just keep on going. And so they may ? for a while. It is possible that southern Europe will give the Germans until the autumn to come around to a new approach. But toleration for austerity is unlikely to last much beyond then.

A moment of truth is surely approaching. Joachim Gauck, the German president, has called for a new debate on Europe, and suggested that its future lies in reviving the idea of a commonwealth of nations. But if such a debate is to go anywhere, it will have to confront the question of monetary union. For Europe may be approaching a stark choice: giving up the euro; or keeping it and seeing the political crisis spin out of control.

The next German election is coming up in September (and it's possible that we'll see another Italian election, then, too, depending on the stability of any new government that can be formed).

Europe is in the mist of a clear economic tragedy. The longer it goes on, the more likely we'll see a full-on political tragedy as well.

For more on Europe's economic tragedy, see here >

Source: http://www.businessinsider.com/citi-on-the-italian-elections-2013-3

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