Don’t start putting out the tinsel yet. Just when we thought we had a smooth glide path into Christmas the euro zone has bitten back.
Over the weekend, Italy’s Mario Monti called Silvio Berlusconi’s bluff and said he was pulling the government down which will mean early elections in February. The budget bill will be passed and then the country will be in a potentially precarious state of limbo as parliament is dissolved. Italian bond futures have opened more than a point lower, which denotes a reasonable measure of alarm, although the safe haven Bund future has only edged up so we’re far from panic mode.
The big question is whether a government results that will stick to Monti’s agenda and whether he himself will have a prominent role to play in the administration. There are constitutional difficulties to keeping Monti as prime minister since he has said he would not stand at the election, though he has also said he would be prepared to step in again if no stable government is formed. Most likely, presuming a government is elected that supports his reforms, is that he will play a key role but not take the top job.
That would not be possible if Berlusconi’s bloc won – the result that would really spooks markets – but on the basis of the old adage that the assassin never wears the crown, this should not be good for Berlusconi. Well behind in the polls, he now has less time to turn things around and could be blamed by the public for withdrawing support for Monti’s technocratic government. Centre-left leader Bersani looks to be in pole position and is signed up for much of Monti’s reform agenda. But if we get a messy, fractured result in February, bond market pressure could seriously escalate again. In a country that must be wearying of its economic plight and deep recession, nothing is certain.
If markets do react nervously, the backwash will lap at Spain’s shores and, if it persists, could possibly tilt the balance in favour of Madrid seeking help from the euro zone rescue fund and the ECB. But we’re a long way from that yet. Much of this may be up for discussion in Oslo today where EU leaders are heading to pick up the Nobel Peace Prize. With an EU summit due at the end of the week it would seem too good an opportunity for meangingful talks to turn up.