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Italian Deadlock Rekindles Anxiety About Euro Zone Italian Deadlock Rekindles Anxiety About Euro Zone
(about 2 hours later)
ROME — The political gridlock in Italy revives a question that hasn’t been heard lately: Is the euro zone crisis really over?ROME — The political gridlock in Italy revives a question that hasn’t been heard lately: Is the euro zone crisis really over?
Judging by the panic that seized financial markets on Monday, and carried over into European stock and bond trading Tuesday, the answer seems to be no. Judging by the panic that seized financial markets on Monday and carried over into European stock and bond trading on Tuesday, the answer seems to be no.
After months of calm, investors are jittery not only because Italy, once again, seems to have become ungovernable after an inconclusive political election. It is also because voters in the euro zone’s third-largest economy — after Germany and France — soundly repudiated government austerity policies that the region’s leaders have long embraced but that have hampered growth in Italy and elsewhere in the euro currency union. After months of calm, investors are nervous, and not only because Italy again seems to have become ungovernable after an inconclusive political election. They are also worried because voters in Italy, the euro zone’s third-largest economy after Germany and France, soundly repudiated government austerity policies that the region’s leaders have long embraced but that have hampered growth in Italy and elsewhere in the euro currency union.
By supporting a protest-vote candidate, the comedian Beppe Grillo, and backing the return of former prime minister Silvio Berlusconi, who has vowed to reject austerity, Italians appear to be embracing a return to nationalism, experts say. By supporting a protest-vote candidate, the comedian Beppe Grillo, and backing the return of former Prime Minister Silvio Berlusconi, who has vowed to reject austerity, Italians appear to be embracing a return to nationalism, experts say.
Swept aside by the Italian elections was the technocratic government led for the past 13 months by Mario Monti, who has been crucial to an unwritten accord: The European Central Bank promised to help contain the financial contagion that was threatening the euro zone as long as political leaders like him made headway in improving their economies. Swept aside by the Italian elections was the technocratic government led for the last 13 months by Mario Monti, who has been crucial to an unwritten accord: the European Central Bank promised to help contain the financial contagion that was threatening the euro zone as long as political leaders like him made headway in improving their economies.
The upheaval in Italy means that other euro zone leaders may no longer have a reliable partner in the drive to create a more durable currency union, and that Rome’s voice in European policy making will be diminished, for now at least. The upheaval in Italy means that other euro zone leaders may no longer have a reliable partner in the drive to create a more durable currency union and that Rome’s voice in making European policy will be diminished, for now at least.
“This brings back all the political risk issues” that had seemed to fade from the euro zone, said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.“This brings back all the political risk issues” that had seemed to fade from the euro zone, said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.
To be sure, Europe’s debt crisis is not nearly as dire as it once was. Even though Italy’s borrowing costs, as measured by its 10-year bond yield, hit a three-month high on Tuesday of nearly 4.9 percent, that is still nowhere near the 6.5 percent danger zone of last summer. On Tuesday, stocks fell across Europe, with the Euro Stoxx 50 index, a barometer of euro zone blue chips, down 3.1 percent. Investors also continued to dump Italian debt, pushing up the yield on the 10-year sovereign bond 40 basis points to almost 4.9 percent. Portuguese, Spanish and Greek bond prices also fell. Perhaps most significant is the role of the European Central Bank in this period of renewed euro zone uncertainty. The bank rode in as a white knight in September by agreeing to buy large amounts of bonds from countries with shaky finances, including Italy, to calm a contagion of fear then sweeping the euro zone. The bank, run by Italy’s former central banker, Mario Draghi, vowed to do “whatever it takes” to hold the euro union together.
And despite renewed fears of instability, no one is talking about a breakup of the euro zone — as might have happened last year if such political uncertainty had beset one of Europe’s most crucial economies. The newfound stability follows a shift in sentiment that took hold last autumn after European politicians, led by Chancellor Angela Merkel of Germany, made clear that the euro union is here to stay — no matter what. The issue now, experts say, is that Mr. Draghi’s promise was based on an implicit trade-off with euro zone governments. If countries agreed to conditions intended to make their economies perform better, the central bank would buy their bonds to hold down market interest rates.
Experts said the vote served as a warning shot that a new round of political instability could be coming in the neighboring large economies of Spain and France, whose leaders have also adopted austerity programs to keep the euro debt crisis from engulfing their economies — despite concerns that the programs are impeding the economic rebound that might help them grow their way out of financial distress. So far, the bank has not bought any bonds. The mere commitment to do so has been enough to reassure international markets. But Italy’s new political turmoil might prompt investors to test the central bank’s resolve. If so, many experts doubt that the bond-buying program is workable — for Italy, at least.
“Without a stable government, it will be hard to qualify” for the program, said Lucrezia Reichlin, a former director of research at the bank who is now a professor at the London Business School. “Draghi has to have somebody to talk to.”
Europe’s debt crisis is not nearly as dire as it once was. Although Italy’s borrowing costs, as measured by its 10-year bond yield, hit a three-month high on Tuesday of nearly 4.9 percent, that is still nowhere near the 6.5 percent danger zone of last summer.
And despite renewed fears of instability, no one is talking about a breakup of the euro zone — as might have happened last year if such political uncertainty had troubled one of Europe’s most crucial economies. A shift in sentiment took hold last autumn after Mr. Draghi and European politicians, led by Chancellor Angela Merkel of Germany, made clear that the euro union was here to stay — no matter what.
But experts said the Italian vote served as a warning shot that a new round of political instability could be coming in the neighboring large economies of Spain and France. Their leaders have also adopted austerity programs to keep the euro debt crisis from engulfing their economies, despite concerns that the programs are impeding the economic rebound that might help them grow their way out of financial distress.
With Italy sidelined and France and Spain weakened, Germany will very likely be even more dominant in European policy forums. Ms. Merkel may be tempted to talk even tougher with weaker euro zone members. And facing elections herself in the fall, she may be less willing to commit German taxpayer money to holding together the currency union.With Italy sidelined and France and Spain weakened, Germany will very likely be even more dominant in European policy forums. Ms. Merkel may be tempted to talk even tougher with weaker euro zone members. And facing elections herself in the fall, she may be less willing to commit German taxpayer money to holding together the currency union.
“We are going to have six or nine months of Italy being absent, which leaves Germany as dominant as ever,” Mr. Kirkegaard said. “For the rest of the year Germany is primus inter pares.” “We are going to have six or nine months of Italy being absent, which leaves Germany as dominant as ever,” Mr. Kirkegaard said. For the rest of the year, Germany is the first among equals, he said.
Perhaps more significant is the role of the European Central Bank, in this period of renewed euro zone uncertainty. The E.C.B. rode in as a white knight last September by agreeing to buy large amounts of bonds from countries with shaky finances, including Italy, to calm a contagion of fear then sweeping the euro zone. The E.C.B., run by Italy’s former central banker, Mario Draghi, vowed to do “whatever it takes” to hold the euro union together. Few experts anticipated the depth of anger displayed by Italian voters over the austerity that Mr. Monti, the technocrat beloved by other European leaders but resented at home for pushing tax increases and spending cuts, represented. The electorate chose two men convicted of crimes — Mr. Berlusconi and Mr. Grillo — over the one Italian leader in whom the rest of Europe had put great faith.
The issue now, experts say, is that Mr. Draghi’s promise was based on a quid pro quo with euro zone governments. If countries agreed to conditions designed to make their economies perform better, the E.C.B. would buy their bonds to hold down market interest rates. Mr. Monti initially resisted Ms. Merkel’s harsh austerity prescription, warning that it would stifle growth. But he nonetheless pushed a number of measures that reflected the Merkelian view that prudent finances were the fastest way to reduce Italy’s staggering debt and restore its reputation with international investors. In the end, Ms. Merkel’s embrace played a big part in Mr. Monti’s undoing.
So far, the E.C.B. has not bought any bonds. The mere commitment to do so has been enough to reassure international markets. But Italy’s new political turmoil might now prompt investors to test the E.C.B.’s resolve. If so, many experts doubt whether the bond-buying program is workable — for Italy at least.
“Without a stable government it will be hard to qualify” for the program, said Lucrezia Reichlin, a former director of research at the E.C.B. who is now a professor at the London Business School. “Draghi has to have somebody to talk to.”
Few could have anticipated the depth of anger displayed by Italian voters over the austerity that Mr. Monti, the technocrat beloved by other European leaders but resented at home for pushing tax increases and spending cuts, represented. The electorate chose two men convicted of crimes — Mr. Berlusconi and Mr. Grillo — over the one Italian leader in whom Europe had put great faith.
Mr. Monti had initially resisted Ms. Merkel’s harsh austerity prescription, warning that it would stifle growth. But he nonetheless pushed a number of measures that reflected the Merkelian view that prudent finances were the fastest way to reduce Italy’s staggering debt and restore its reputation with international investors. In the end, Ms. Merkel’s embrace played a big part in Mr. Monti’s undoing.
“The fact that Merkel was so involved and interested in our elections — her support was very negative for Monti’s fate,” said Tito Boeri, an economist at Bocconi University. “There is no doubt that in the Italian campaigns and vote there was a clear message against Europe.”“The fact that Merkel was so involved and interested in our elections — her support was very negative for Monti’s fate,” said Tito Boeri, an economist at Bocconi University. “There is no doubt that in the Italian campaigns and vote there was a clear message against Europe.”
Since the euro zone crisis began in 2010 European voters have generally shown remarkable forbearance in the face of recession, soaring unemployment, tax increases and cutbacks in government services. Ireland, Spain, the Netherlands, Greece and, last week, Cyprus chose centrist governments that offered the best chance of staying in the euro zone. Since the euro zone crisis began in 2010, European voters have generally shown remarkable forbearance in the face of recession, soaring unemployment, tax increases and cutbacks in government services. Ireland, Spain, the Netherlands, Greece and, last week, Cyprus chose centrist governments that offered the best chance of staying in the euro zone.
Italy may just be being Italy. But this latest vote may also be a sign that the public is reaching the limit of their patience. Indeed, experts said the developments here served as a warning that a new round of economically driven political turmoil could confront the Spanish prime minister, Mariano Rajoy, and France’s president, François Hollande, who have both grudgingly adopted austerity to keep the euro crisis at bay, despite recessions and rising unemployment. Italy may just be being Italy. But this latest vote may be a sign that Europeans are reaching the limit of their patience. Experts said the developments here served as a warning that a new round of economically driven political turmoil could confront the Spanish prime minister, Mariano Rajoy, and France’s president, François Hollande. Both have grudgingly adopted austerity to keep the euro crisis at bay, despite recessions and rising unemployment.
The French newspaper Le Monde, in an editorial published Tuesday, described the Italian election outcome as “alarming for Europe” and asked whether the tension between economics and politics was threatening the unity of the European Union.
Italy, for its part, is mired in a recession that so far has lasted a year and a half. The economy is expected to contract further before improving — largely, many Italians say, because of a host of tax increases and spending cuts that Mr. Monti put in place.Italy, for its part, is mired in a recession that so far has lasted a year and a half. The economy is expected to contract further before improving — largely, many Italians say, because of a host of tax increases and spending cuts that Mr. Monti put in place.
And like other countries, Italy is finding that austerity is making it harder, rather than easier, to stoke the growth needed to pay down the mountain of debt that ignited the euro zone’s crisis in the first place. Its gross debt is expected to peak above 128 percent of gross domestic product this year — the highest in the euro zone, after Greece, and up from 126 percent last year. And like other countries, Italy is finding that austerity is making it harder, rather than easier, to stoke the growth needed to reduce the mountain of debt that set off the euro zone’s crisis in the first place. Its gross debt is expected to peak above 128 percent of gross domestic product this year — the highest level in the euro zone after Greece, and up from 126 percent last year.
Low growth is not necessarily new to Italy: high taxes, an inflexible labor market, red tape for businesses, government corruption and organized crime are among the problems that have impeded Italy’s growth potential for the better part of two decades.
No matter that Italy’s budget deficit is below the 3 percent of G.D.P. mark required of euro members. Or that it has a primary surplus — a budget surplus when the cost of interest on the debt is factored out — that other countries would envy.
With these latest developments, analysts say, market pressures could nevertheless return to Italy and other euro zone countries, even if not with the make-or-break urgency that characterized the euro crisis just a few months earlier.With these latest developments, analysts say, market pressures could nevertheless return to Italy and other euro zone countries, even if not with the make-or-break urgency that characterized the euro crisis just a few months earlier.
“It will be more like strangling someone in a slower way,” said Federico Fubini, an economics columnist at the Corriere della Sera newspaper. “It will not be immediate and dramatic, but the pressure will be unsustainable and unrelenting,” he said. “It will be more like strangling someone in a slower way,” said Federico Fubini, an economics columnist at the Corriere della Sera newspaper. “It will not be immediate and dramatic, but the pressure will be unsustainable and unrelenting.”
Jack Ewing reported from Frankfurt.

Liz Alderman reported from Rome, and Jack Ewing from Frankfurt.