Is Italy about to add some bite to its bark as far as the euro zone is concerned? Quite possibly. An opinion poll last night showed Silvio Berlusconi’s centre-right coalition is charging up along the rails, increasing the chances of a messy election result with the front-running centre-left unable to form a stable government.

Although it retains a strong lead, the way votes are carved up in the Senate could easily rob it of a majority in the upper house. The huge media coverage Berlusconi can command via his empire may be starting to tell. Technocrat premier Mario Monti, who could yet play a key part in a centre-left administration if his centrist grouping is needed in a coalition, responded to the polling evidence by launching a stinging attack on Berlusconi.

Markets have so far been utterly sanguine about the late February election but if Berlusconi’s resurgence continues, that could change abruptly. The favoured outcome would be a PD (centre-left) government supported by Monti who would act as guarantor of economic reforms needed to increase Italian competitiveness and growth. But a chunk of the Democrat Party (PD) want a sharp change of course from Monti’s austerity path, and its main coalition partner on the left, the SEL, are implacably opposed to his policies. So nothing is certain.

Spain sells up to 5.5 billion euros of 12- and 18-month debt this morning, prior to a hefty bond auction on Thursday. Portugal’s central bank will issue new economic forecasts, which are unlikely to make comfortable reading.
Ireland’s central bank said last night that any adverse euro zone market shock would complicate the country’s efforts to exit its bailout programme.
S&P took the pressure off Finland and Luxembourg, raising their ratings outlook to stable. But it said it could yet cut the Netherlands from ‘AAA’.

Even mighty Germany is not immune. German GDP for 2012 as a whole will be released from which we can extrapolate that Europe’s biggest economy probably shrank in the fourth quarter. But we shouldn’t get carried away. The big picture still shows we’re in a period of relative euro zone calm. Even on the macro front, there are signs that things are picking up again in the new year, at least for the stronger economies – what European Central Bank chief Mario Draghi last week called “positive contagion”.