Italy faces nerve-racking game of chicken

By Hugo Dixon
November 9, 2011

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Italy faces a nerve-racking game of chicken. As in Greece, a prime minister’s resignation doesn’t mean the rapid appointment of a national unity government able to grasp the country’s problems. Bickering politicians will have to be brought into line by impatient markets – and continued pressure from the rest of the euro zone.

Italian bonds haven’t even enjoyed a post-Silvio Berlusconi bounce. In early trade on Nov. 9, 10-year yields shot through 7 percent, a new euro-era high that takes the country closer to a debt spiral.

Investors would like to see a grand coalition supported by all major political parties and led by a respected technocrat such as Mario Monti, the former European Commissioner. But that’s not going to happen with the wave of a magic wand. For a start, Berlusconi still formally rules until Italy passes the key reforms agreed last month with its euro zone partners. That may take a few weeks, or even longer. Then there will be a dispute on whether to call early elections (as Berlusconi wishes) or to form a coalition (as the opposition wants). The opposition won’t get its way unless Berlusconi changes his mind or his party splits.

The situation is somewhat similar to Greece, where politicians have been wrangling over who should replace George Papandreou, what his mandate will be, how whole-heartedly opposition parties will back the new government and when elections will be held.

National unity governments are a great idea in theory. But there is a risk that what gets cobbled together in both countries will neither be national, unified or capable of governing.

Fortunately, the domestic politicians aren’t operating in a vacuum. Pressure is mounting from abroad: investors, the other euro zone countries, the European Central Bank and the International Monetary Fund. This needs to be maintained in order to bring the politicians to heel. That probably means months of volatile markets and brinkmanship before things settle down – and, of course, with the permanent danger of somebody doing something stupid in the meantime.

Calculator: Italian debt spiral

Comments

Everything I’ve read regarding Italy, Greece and others buried in debt, says that most leaders are now acknowledging that big government is the problem (unsustainable, huge legacy costs, etc)
Everything I read coming out of the Whitehouse and most of Congress is saying our leaders believe bigger (spend our way out) government is the answer! What’s wrong with this picture-anyone?

Posted by DrJJJJ | Report as abusive
 

The traditional left-right divide has become a chasm, not just in America, but across Europe as well. This political paralysis is the biggest single factor that is spooking the markets.

Of course, the huge load of debt that was transferred to the sovereigns in the bailouts of 2008, along with the debt they’ve piled up as a result of their socialist paths, is extremely worrying. But if the political paralysis wasn’t in the forefront so much then the markets wouldn’t be so plagued with uncertainty.

We’ve seen two governments collapse in one week due to the financial crisis. And still there’s little if any evidence the politicians are able to bridge the left-right chasm. It’s widening, if anything.

And when you add in the fact that Europe’s leaders are, in effect, nothing more than cyanide pill pushers, blindly and stubbornly forcing the bitter pill of ever more radical austerity upon troubled economies as a supposed cure-all for the debt crisis, then think of the political atmosphere that creates for the politicians that have to try to form unity governments to replace ones that have fallen. They’re being pounded on all sides by internal and external political and market forces. Under these extreme conditions, whatever they come up with will be a farce.

The whole situation is so bizarre that no words can describe it. But the history books will try, and they won’t be kind. And America looks on, witnessing what its own impending financial-economic-political-social demise will look like. This isn’t how you handle a crisis. It’s how you CREATE one far worse than what existed before. At some point you reach the tipping point where there’s no possibility of saving the system from ruin. I believe we’ve already reached that point.

Posted by NukerDoggie | Report as abusive
 

It’s quite obvious who runs Greece and Italy now – Eurocrats and bankers who want to control the entire Euro area. It is a total loss of democratic rights and will lead to a lot more trouble, even revolution.

Posted by wyldbill | Report as abusive
 

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