Italy continues to dominate European financial markets and it looks like the best they can expect is populist Beppe Grillo supporting some measures put forward by a minority, centre-left government but refusing any sort of formal alliance. That sounds like a recipe for the sort of instability that could have investors running a mile. Outgoing technocrat prime minister Monti is speaking Brussels today. The markets’ best case was for him to support the centre-left in coalition, thereby guaranteeing continuation of economic reforms. But he just didn’t get enough votes.
Fresh elections are probably the nightmare scenario given the unpredictability of what could result.
The story of the last five months has been the bond-buying safety net cast by the European Central Bank which took the sting out of the currency bloc’s debt crisis. But now it has an Achilles’ Heel. The ECB has stated it will only buy the bonds of a country on certain policy conditions. An unwilling or unstable Italian government may be unable to meet those conditions so in theory the ECB should stand back.
But what if the euro zone’s third biggest economy comes under serious market attack? Without ECB support the whole bloc would be thrown back into crisis and yet if it does intervene, some ECB policymakers and German lawmakers will throw their hands up in horror. In that respect, the ECB’s previous, more patchwork SMP bond-buying programme was better because it didn’t have conditionality attached.
There are a host of key euro policymakers sticking their heads above the parapets today besides the Italian premier. From the ECB we have Constancio and Praet. Dutch finance minister Dijsselbloem – the head of the Eurogroup – talks to the Dutch parliament ahead of Monday’s meeting of euro zone finance ministers which may begin to grapple meaningfully with a Cyprus bailout. (The pro-bailout Cypriot president will be sworn in later today.)