Italian Elections Could Lead To More Market Volatility

berlIn 2012 economic and political uncertainty swept across the 17 member bloc euro area, resulting in wild swings across global markets as questions swirled about whether the European Union would stay intact and if the European Central Bank (ECB) could take action to save the euro.

Although 2013 has proven to be more politically stable across Europe as February draws to a close, the upcoming Italian elections on February 24-25 clearly has the potential to become another disruptive catalyst for more volatility in global markets.

The third largest economy in the 17 member euro-area, Italy is still coming to terms with the economic fallout of the great recession that swept through the country and crippled its growth.

Known for its uncompetitiveness and stifling labor laws, Italy’s economy is still facing the brunt of tight austerity measures which former Italian PM Mario Monti implemented with the full blessing of German Chancellor Angela Merkel and former French PM Nicolas Sarkozy.

Italy’s debt-GDP ratio is 127 percent this year, second highest only to Greece’s in the euro area and up from the level of 120.1 percent in 2011, when technocrat Mario Monti took over the reigns from Silvio Berlusconi who resigned in 2011, after the country’s bond yields hit an unsustainable level, above 7 percent.

An increase in bond yields above 7 percent means that bond holders would perceive the Italian economy as more unstable, and would be more inclined to sell Italian bonds, causing their prices to decrease.

When Italy’s bond yields increase, it results in the Italian government paying higher interest rates to manage their debt load.

During Mario Monti’s reign, he implemented tax increases and state spending cuts, as well as structural reforms intended to improve the competitiveness of the economy.

Italian Election

Italy’s general election on February 24-25th will determine the 630 members of the Chamber of Deputies and the 315 elective members of the Senate, the two houses of the Italian parliament.

There is much at stake in the upcoming election, most notably the willingness of a newly elected government to follow through with austerity and reform measures to help the Italian economy to become more competitive.

A populist party that many political experts believe could pull out an upset in the upcoming election is Five Star Movement, a new party started by comedian Beppe Grillo.

Five Star Movement has been surging lately in the polls.

Although Grillo is head of the Five Star Movement, he is not running for prime minister, which means in the event Five Star is victorious in the upcoming elections, Italy may still not have a leader of their new government, a complicating dilemma.

Five Star Movement is the anti-establishment, anti-euro party, on the same wavelength as Syrzia Party in Greece.

Grillo has claimed that Five Star Movement won’t join any future coalition government and he won’t serve in parliament.

An obstructionist, Grill is seeking to have enough legislators placed in parliament to collapse the next government and any alliances while forcing another election.

Pier Luigi Bersani, a former communist, is a center-left candidate and former minister whose Democratic party has been tied to a banking scandal.

Silvio Berlusconi is a billionaire and leader of center-right People of the Freedom Party.

Berlusconi is an anti-austerity crusader who has talked openly about rolling back Italy’s adoption of austerity measures.

“With ever more austerity drives, eurozone states will have to leave the euro one after the other”, Berlusconi said at a press conference on February 1st.

Berlusconi has overcome the political pressures of communists and ex-communists in Italy and has been involved in 20 court cases during his political career, including some public scandals.

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