Italy: As Goes Rome, So Does Europe?

This past week, Italian voters – staying true to their unpredictable history – once again shocked Europe by not giving any one political party the majority needed to form a new government.

Financial markets, however, reacted predictably and crashed on fears of the new government implementing voter-mandated anti-austerity policies thereby reversing the ongoing reform of Italy’s public finances and labor laws.

I’d argue the situation is actually much worse because Italian voters have sent a distinctly schizophrenic message to the political establishment. They simultaneously voted for an anti-corruption movement while bringing former prime minister (and current bunga bunga party host) Silvio Berlusconi back from the political wilderness.

The first signal i.e. support for an anti-corruption movement is decidedly positive as over 25 percent of Italian voters, tired of their country’s revolving door of corrupt political leadership, embraced former comedian and blogger Beppe Grillo’s Five Star Movement (M5S).

Consequently, M5S candidates now form the largest block in the lower house of parliament (108 seats in the Italian Chamber of Deputies) and a significant force in the upper house (54 seats in the Senate).

The Grillini – the name given to Grillo’s candidates – are political novices, were selected through a primary election held exclusively online, are young and largely female, and have no criminal record (a condition that also prevents Beppe Grillo from running for office). In short, these aren’t traditional Italian politicians.

However, beyond their anti-corruption message, they do not have a cohesive platform and their leader has vowed to not join any coalition government. Consequently, they are quite difficult to understand, target and predict.

As for the other candidates, Berlusconi’s relatively successful campaign pledged tax cuts, attacked Prime Minister Mario Monti and German Chancellor Angela Merkel. It also supported Grillo’s message, which – given Berlusconi’s history, ongoing trail for sex with under-age prostitutes and the outcome of the election – would be funny if it wasn’t so tragic.

Prime Minister Monti, on the other hand, was decimated by the M5S. Credited with restoring Italy’s international credibility, he was always going to have a tough time getting voters to support his tough-love policies. However, when the Grillini came on the scene, they pretty much destroyed his chances.

The winner – in terms of the total number of votes at least – was Pier Luigi Bersani and his center-left Democratic Party. However, since he doesn’t have a conclusive majority, Bersani is being forced to try and form a coalition either with Berlusconi – whom he has blamed for destroying his country – or Grillo – who, as noted above, is not open to negotiation and has no policy platform.

In the event that no government is formed, Italy will have yet another round of elections and there are no indications the result will be any different.

Furthermore, given the financial markets’ reaction – Standard & Poor’s recently warned the next government’s policies will be crucial to the country’s creditworthiness – to the most recent result, Italy’s leadership knows a weak government will leave the nation vulnerable to more economic instability.

Finally, the European Union (EU) will clearly work to end this instability and force Bersani to swallow his pride and make a deal with the devil he knows (Berlusconi) or an unknown actor (Grillo).

I believe that Bersani will enter into a coalition with one of these two actors but it won’t last very long and Italy will hold another set of elections before the end of the year.

However, this will only prolong Europe’s pain and may spread the economic insecurity to other countries on the continent. Consequently, the only way to avoid this tsunami would be for the EU to support any coalition government with stimulus funds with the condition – lightly imposed – that it continue to implement the measures started by Monti.

If this does not happen then the uncertainty just continues and Europeans should get ready for more pain.