Eurozone risks new crisis

The election was seen as an opportunity to resolve Italy’s economic problems and the EU hoped for political stability in Italy to turn around the EU’s economy. But the election result dashed these hopes. 

The election was held earlier than scheduled after the center-right People of Freedom Party (PDL) of former Prime Minister Silvio Berlusconi withdrew its support for the administration of Prime Minister Mario Monti, forcing him to resign early this year.

The election was important for not only Italy, but the EU as a whole, because it was a referendum on the austerity policy and economic reforms initiated by Monti, backed by many world leaders including US President Barack Obama and German Chancellor Angela Merkel.

When Monti took office in November 2011, Italy was facing a serious crisis with a 120 percent ratio of public debt to GDP, second only to Greece. Monti’s austerity measures and tax hikes reduced the ratio of budget deficit to GDP from 3.9 percent in 2011 to below 3 percent last year, an acceptable rate to the EU.

During 15 months under the Monti administration, the interest rate on Italy’s 10-year bond went down 200 basis points. But the austerity measures pushed the economy to the longest crisis over the last 20 years. It contracted 2.2 percent in 2012.

The Italian government predicted the economy to further go down by 0.2 percent this year and only rebound by 1.1 percent in 2014.

Economic recession has increased unemployment and poverty. Last December, the unemployment rate reached the highest record of 11.2 percent which made many Italian people turn their back to the government’s austerity measures.

The Italian Interior Ministry announced the election in late February that no political party holding clear majority votes to control the two legislative houses. In the coming time, Italy’s parliament is considered a pending parliament that could not work effectively.

Analysts say in such a divided parliament, any policy could be a result of behind the scene settlement. It will tarnish investors’ confidence and the country is pushed to the verge of a new political instability.

Political instability in Italy would push up borrowing costs for struggling European countries such as Spain, Portugal, and Greece. Observers say reality shows strong opposition of Italian voters and European people to the austerity measures being applied in many Eurozone countries.

People concern that Monti’s leaving would derail Italy from its reform path and worsen the Eurozone’s public debt. It would strongly impact the EU in achieving consensus without Monti, who overcame Germany’s opposition at the EU summit last June to help the EU reach consensus in financial assistance for countries in need.

Italy’s constitution defines that the new parliament will open the first session within 20 days after the general election. Then the President will discuss with political parties on forming the government. Observers say prolonged economic recession would remain in this country because the new government is not strong enough to pursue a tough reform to strengthen the economy’s competitiveness.