The continuing fragility of the eurozone was revealed by this weekend’s Italian general elections. The surprise success of a comedian, Beppe Grillo, unnerved markets enough that Italian bond yields shot up overnight and depressed the euro’s value. European leaders had to come out and make reassuring noises. And this was even before the nature of the new Italian government and its policies was clear. Yet the vote did send a troubling message about the public mood in Europe. The centre-left coalition of Pier Luigi Bersani won a slim majority in the lower house. The combined vote of Mr Grillo and the conservative candidate, Silvio Berlusconi, however, indicated a troubling majority of Italian voters supported an end to continuing economic austerity. The only candidate who backed the present regime of fiscal prudence was the outgoing Mario Monti and he received barely 10% of the vote.
There are two key concerns arising from the Italian vote. One is that of an Italian government that cannot govern and, more importantly, continue the austerity package that Mr Monti had hammered out with the other eurozone governments. This would mean a return to the roller coaster of rising bond yields, falling credit ratings and threats of a euro breakup that troubled the global economy last year. The other, and more probable, is that Italy’s verdict would reignite the debate over the social costs of austerity that continues to trouble the eurozone.
Germany and other creditor nations in Europe have successfully insisted that overly red-inked nations like Italy — whose GDP debt is the third highest in the developed world — must live within their means. France, and now Italian voters, have argued the social costs and negative growth impact of austerity are simply too high. Better to spend more, make the economies grow and use the additional revenue generated to pay off the debt. Germany has been winning this argument, not least because of the support of the markets who would have probably dumped all eurozone debts if France’s view had prevailed. The truth is that there is no option to austerity given the size of the debts involved and the uncompetitiveness of many European economies. Italian voters have expressed their confusion. But Rome cannot afford to be so uncertain.