The Eurozone Hangs On By a Whisker

Four days after the Italian elections only one thing is clear: A majority of Italian voters have rejected austerity.

The problem is their victory came up short by the slimmest of margins.

0.36%. That's the difference between a firm new government that could move Italy out of the Eurozone and the constitutional logjam Italian voters woke up to the next day.

As it is, they could roll the dice on a new election, but that could also make matters worse.

Since Italy's a big country with a chunky economy, that's likely bad news for us all.

Another Fine Italian Mess

As I wrote a couple of weeks ago, the clearest solution for Italy would have been the return of its former leader Silvio Berlusconi, bunga bunga parties and all.

But that outcome missed by the thinnest of whiskers. Here's why.

The anti-Euro parties of Berlusconi and Comedian Beppe Grillo got 55% of the vote between them, while the EU toady Mario Monti got zapped, getting only 11% of the vote. Great stuff!

In a normal constitution, Berlusconi and Grillo could have formed a government provided the two could work together. This broad-based coalition of comedians, amateur and professional, could have led Italy out of the euro and away from austerity.

With 55% of the vote between them, they would have had a firm majority.But alas, the Italian constitution is far from normal.

The Italian constitution has a provision that guarantees the party that receives the most votes gets 55% of the seats in the lower house of the legislature.

By 0.36% of the votes, Berlusconi's group failed to beat the socialist "Democratic Party" of Pier Luigi Bersani, who was the EU's favorite to form a coalition with Monti.

So Bersani-- not Berlusconi-- got 55% of the lower house seats. That means that any coalition that fails to include Bersani can't actually form a new government.

Of course, it is true that Berlusconi has more seats in the Senate and could form a coalition with Grillo there, but that's no use to him because he couldn't govern without the lower house.

The end result is that Bersani and his leftists are an unavoidable part of any government.

But it's not even that simple-not by a long shot.

A Bersani/Monti coalition, the EU's favorite, can't govern because it can't get a majority of the Senate.

A Bersani/Berlusconi coalition or a Bersani/Grillo coalition would have a solid majority, but would be completely divided on what to do about the euro, Italy's most important economic question.

In other words, the Italian electorate and its bizarre constitution have combined to produce chaos.

What Does It All Mean?

It means the euro crisis will stagger on for another several months. Italy will not leave the euro, but it won't undertake policies that might allow it to survive within it, either. Money will be provided grudgingly, probably by the European Central Bank, and Italy's recession will continue.

Spain, better governed than Italy, will slowly pull ahead of its Mediterranean neighbor - currently its budget deficit is worse, but its debt is not so large.

Meanwhile France, under the Hollande government -- home of considerably worse policies than Italy -- will slowly deteriorate, as its high taxes cause high earners to flee.

The next euro panic will probably be in either France or Greece, which is still in a mess both political and economic. The euro zone as a whole will stagnate, with the government's share of the economy drifting upwards in most Eurozone economies.

But for the EU bureaucracy, defeat in Italy will have been avoided, by the slenderest of margins, and so the euro struggle will continue - until the next time.

For us as investors, the whole region is better avoided - even Germany (which has its own election in September) won't rise much above the sluggishness that surrounds it.

Where Italy Goes From Here

Meanwhile, my guess is that a short term government will be formed, led by Bersani with either Berlusconi or Grillo, pledged to getting as much money as possible out of Italy's EU partners to stay in the euro until another election.

Since this government won't achieve much except agreeing to dictation from Brussels, it will be unpopular -so the smarter of Berlusconi or Grillo will stay out of it, hoping to pick up just enough support at the next election to form a government itself.

My bet is that Berlusconi will figure this out before the inexperienced Grillo, so the most likely government is Bersani/Grillo, with the comedian's "Five Star Movement' being outmaneuvered constantly by the politically adept Bersani and thus having very little power.

Since the "Russian Roulette" of the 55% rule will be obvious to Bersani, he will almost certainly attempt to change the constitution to abolish it before the next election, but that requires a 2/3 majority, so may it not be possible.

In short, the outcome of the Italian election only means the Eurozone crisis will continue to boil.

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