Key Takeaways From Italian Election

Italian Election Results

Italy could reignite euro crisis | Hugo Dixon.

The result of Italian elections was a stalemate as three of the four main candidates essentially tied with each being able to claim a piece of victory.

Bersani, the pro-German candidate, won a majority of the lower house by a couple of tenths of a point over Berlusconi; believe it or not a recount could give Bunga the first crack at forming a government and he already has the largest bloc of senators in the upper house.

Grillo represents populist anger and is considered to be a protest candidate.  His party won the overall popular vote. Unelected caretaker Prime Minister Mario Monti came in a distant fourth. His poor showing is really what is screwing everything up. Had he polled decently, his party could have formed a governing coalition with Bersani. After all, they are both pro-German candidates.

I am not being snarky by referring to those candidates as pro-German.  Italians recognize the need for change and support the euro. What they detest is having terms dictated to them by Merkel.  While the rest of the world was lauding Mario Monti’s reforms, Italians viewed him as a figurehead merely imposing German demands for austerity on Italians.  Both Grillo and Berlusconi recognized this and were able to use the prevailing political winds to their advantage.

Grillo will work with neither Bersani nor Berlusconi out of principal.  He calls all politicians failures. Furthermore, after establishing his party as a force in these elections, he has a good chance of improving his position to win a potential second round.  The best ideological choice and the best political choice are the same, refusing to form a government with the establishment and taking his chances with a second election.

Berlusconi reentered politics out of spite. Honor is very important to Italians.  Merkel spoke of him with barely concealed contempt and could barely keep a straight face while doing so.  Additionally, she was behind his fall from government politicking the ECB to allow Italy’s bond yield to rise to unacceptable levels. I am convinced that Bunga is attempting to reduce her European standing in advance of German elections. Continued political chaos would fit his agenda. He obtains this objective by either forming a weak grand coalition with Bersani or allowing a second election.

Bersani would form a coalition with either of these groups.  He should not have been forced to do so except that his putative coalition partner, Mario Monti, performed so poorly.  Since most Italians see him as a German puppet, his distant fourth place finish should not have been a surprise.

There are two scenarios for the next act, and I assign equal probability to each.  Bersani and Berlusconi could form a grand coalition.  This would allow Berlusconi time to plot his next move.  The other is a second round of elections. The danger for Bersani and Berlusconi is that Grillo could improve just enough to win if given the opportunity.

The markets are atwitter at these results. The MSM talks about the eurocrisis being back, but savvy readers of Dareconomics know that it never went anywhere. The ECB began printing money under various guises. First they called it Securites Market Program (SMP) and monetized the debt of the PIIGS.

This wasn’t working so they invented a new way to print and called it Long Term Refinancing Operations (LTRO) where they loaned cash to failing banks who in turn purchased the sovereign debt for them, also known as the Sarkozy trade.  Again, this program failed to tamp down bond yields causing the ECB to return to the drawing board and create Outright Monetary Transactions (OMT) promising to buy debt in unlimited quantities.

The last one did the trick causing yields to move down to acceptable levels from the ECB’s perspective. All throughout this saga, the economic and fiscal fundamentals that ignited the crisis did not change. The only thing levitating European stock and bond markets was the Draghi put on the entire financial system  The Italian elections have merely served to show the world that money printing is a salve that offers temporary relief to a symptom while doing nothing to address the underlying disease.

The results of the election and their effect on markets should not have come as a shock to anyone. Steve Englander from Citigroup wrote:

This is the first European election in which voters didn’t do the right thing…They gave surprising support to politicians who reject austerity and, in some cases, the euro. This could become a major problem if it proves contagious.

The problem with Mr. Englander’s analysis is that he is a bankster, so he believes that citizens paying taxes to bailout problem banks and countries is the “right thing.” This is why he is so surprised that voters reject policies that are not working for them. In every country that has elected a pro-German government, Portugal, Ireland, Greece and Spain, a worsening recession caused by austerity was the result.  Sure, insolvent banks and governments are kept afloat, but the people continue to suffer from economic contraction and high unemployment.

Englander is right about one thing. A contagion may begin spreading. Once a country is forced to request activation of OMT, investors in PIIGS debt will learn that the Draghi promise to do “whatever it takes” was a bluff. The FANG countries will not allow the ECB to run up the hundreds of billions of euros in debt necessary to bail out the periphery without serious conditions. I do not believe that the politicians in Italy and Spain have the clout to implement them.

The longer it takes Italy to form a government, the more bond yields will rise.  Once they hit a tipping point, the ECB will be forced to act. This is when the game will become interesting. It is in Germany’s interest to do anything to maintain the eurozone, but Spain and Italy will be unable to implement more reforms. Will the Germans blink and allow unconditional debt monetization?

Without the elections, I would say that they would without question, because maintaining the cheap euro is in Germany’s interest. However, when these same politicians have to face angry voters with bailout fatigue, defending unconditional debt monetization will alter the dynamics of the campaign.


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