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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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Join the conversation. Click here to jump to comments…

  1. Shyam Sundaresan | February 28, 2013

    very well said…

  2. felix mosso | February 28, 2013

    Thoughtful article on the Italians…….seems that politicians are ALL THE SAME World wide. Too bad for all of us, including the USA.

  3. Michael Krasnow | February 28, 2013

    Your analysis is so weighted toward the interests of the wealthy right that it is difficult to take seriously. Just the fact that you can give any credibility or support to the ridiculous Berlusconi negates you as a serious voice of analysis, speaking only to serve the further financial enhancement of your sponsors and you personally. Do people with wealth, earned or inherited, not have any responsibility to the good of the general society? Before you start the "name-calling", as you did with Bersani's Party, perhaps some self reflection might wake up some moral grounding you may have developed sometime in your life, before self financial interest held sway. By the way, I am not connected in any way with any of the contending Parties.
    Leave a legacy your family can be proud of. Wealthy does not mean selfish. I do not say this to excoriate you, only as food for thought.

  4. Rem | February 28, 2013

    The Italians may use their inability to govern to force EU, and in particular the Germans, to reconsider austerity policies. It may turn out to be a very good thing after all. Seriously I don't think that Italy leaving the Euro would do any good to Europe overall since the Italian revival would come at the expense of other EU nations like France and Germany.

  5. Giorgio Sobrero | February 28, 2013

    Diapers and politicians should be changed often, both for the same reason.

  6. joseph | February 28, 2013

    dollar & euro zones are on commitment: both systems actually tax workers & consumers instead of sharing for them what should be taken upon excessive profits without work.
    That's why banks are in the middle of the struggle .
    China "degazing" accumulated dollars & euros, might drastically change the situation, by giving back in one time the stolen inflation , and making debt system fall down….
    But when?

  7. DD | February 28, 2013

    One reason why Italy, Spain, Portugal, Ireland are in more dire straits is because they CANNOT print money unlike the UK, Germany etc INCLUDING THE USA! It is the money printing that is kicking the can down the road, but in reality these money printing countries are in the exact same boat and Italy et al.

    If the Euro-zone is hanging on by a whisker, what does that say about the US who reached their GDP at the end of 2011? But sshhh we can't let the world know this can we? The US is tens of trillions of dollars in (true) debt which it has yet to address in any way shape or form. Once it is forced to deal with its debt, then the world will truly see who is really hanging on by a whisker underneath the facade it portrays that things are not as bad as they seem = totally untrue at best!

  8. David Stuart | February 28, 2013

    Grillo has said he will not support Bersani or Berlusconi so of he holds to that line stalemate will continue and maybe another election will have to be called, sooner rather than later. In any event, as you rightly say, it proves (if proof were needed) that the crisis in the eurozone is far from over. Watch this space, as the saying goes.

  9. Guglielmo | February 28, 2013

    Please Mr. Hutchinson, when you comment about Italy try to get an acceptable level of information. The electoral law in Italy is not part of the constitution. It was approved by the Italian Parliament a few years ago, when Berlusconi's party had a large majority in both chambers. Unfortunately the Monti's government was not able to change it because Bersani wanted to exploit this law, hoping to get a dominance in both chambers.
    To get a new law only a simple majority is needed, not a 2/3 one.

  10. Luke Sterling | February 28, 2013

    Michael Krasnow's response is entirely correct. I second what he says here. Lived 25 years in Italy. What the country needs today from journalists abroad is a more finely nuanced reporting than is provided by Mr. Hutchinson here. Anyone suggesting Mr. Berlusconi provides a viable option is more than a little removed from the reality in Italy today. I am centrist politically but I get depressed seeing analysis which adheres quite as slavishly to mere political partisanship as is evident in Mr. Hutchinson's analysis above.

  11. David R. | February 28, 2013

    We can only hope that Grillo, the comedian, can keep us laughing while Rome burns.

  12. David J | February 28, 2013

    without disrespect you are right but you are wrong.To change a law you are right but to change the constitution you are wrong, you need 2/3

  13. Luke Sterling | March 3, 2013

    For all those here commenting smirkingly about Mr. Grillo's 5-Star movement – (especially Mr. Hutchinson) please read this article to understand how woefully uninformed your insight is about this group's role in these elections. A lot more meat in this article than in Mr. Hutchinson's easy prescription for another term for Berlusconi.

    Suggestion: leave the intellectually lazy party-line politics at the door:

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