Italian Elections: Split Vote "Worst-Case" for Eurozone

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If preliminary results prove accurate, the Italian elections will result in a "hung" parliament, meaning no party will have enough seats to form a government.

The lack of a definitive result could temporarily paralyze the Eurozone's third-largest economy and revive fears that Italian voters will ultimately reject austerity and the euro itself.

Such a development would threaten to reignite the Eurozone debt crisis, setting off an economic shock that would ripple out to markets around the world.

As of Monday afternoon, the center-left forces of Pier Luigi Bersani appeared set to win Italy's lower house, while the center-right party of former Premier Silvio Berlusconi looked headed for victory in the Italian Senate.

In the Italian political system, a prime minister must have a majority coalition in both legislative houses in order to form a government. Unless one of the leading parties can form a majority in both houses by partnering with one or more other parties, a new round of Italian elections will be needed.

"A hung parliament would be a guarantee of stillness both in terms of economic program and structural reforms," Annalisa Piazza, a fixed-income analyst at Newedge Group in London, told Bloomberg News. "Such a scenario would be the worst-case outlook."

Italian and European markets, which rose on early reports that Bersani's group was ahead in both houses, fell later on the news that Berlusconi would probably prevail in the Senate. The reports also helped turn U.S. markets negative.

Exactly how all this will play out won't be known for certain for days.

What New Italian Elections Would Mean

Perhaps most concerning to the rest of the Eurozone and the world economy is the possibility that a second Italian election would tilt toward anti-austerity forces of Berlusconi. Polls in the weeks before the election showed Italian voters moving in that direction.

"This possible outcome would have very heavy consequences for Italy at the European level," Enrico Letta, deputy head of Bersani's Democratic Party, told Italian TV channel RAI 3. "Based on these projections, more than half of Italians expressed a vote against austerity, against the euro, against Merkel."

These were the first Italian elections held in the wake of the austerity measures.

Leaders in other Eurozone nations, as well as the European Central Bank (ECB), had been counting on Bersani to win enough votes to form a governing coalition with Mario Monti, the outgoing prime minister who imposed the heavy austerity measures the EU expected in return for continued bailout assistance.

"Both of these candidates were safely pro-euro, and prepared to put Italy through a fair amount of "austerity' to keep it, provided the handouts kept flowing from Germany and the European Central Bank," Money Morning Global Resource Strategist Martin Hutchinson said. "The status quo wouldn't be threatened."

The EU fears that an anti-austerity government led by Berlusconi, perhaps joined by the even more extreme forces of former comedian Beppe Grillo's 5 Star Movement (which was running third in today's results), would reverse Monti's policies.

Given the current results, if Berlusconi could convince Grillo to join with him - a fairly unlikely possibility, as Grillo has vowed to spurn alliances with other parties - he could form an anti-austerity governing majority.

But, Hutchinson said, if that happened "the EU will almost certainly attempt dirty work at the crossroads to stop it."

One thing is clear, however. The late surge for Berlusconi, as well as Grillo's surprisingly strong showing, suggest the Italian electorate has had its fill of austerity.

If we do end up with another round of Italian elections, it's nearly certain that the EU and ECB will like those results even less.

"Most likely we are looking at a second election, so [the impact is] delayed, but at the margin it is a negative," Tim Ghriskey, chief investment officer of Solaris Group, told Reuters.

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