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Don’t count your chickens

9 November 2011 By Hugo Dixon

Italy faces a nerve-racking game of chicken. As in Greece, a prime minister’s resignation doesn’t mean the rapid appointment of a national unity government able to grasp the country’s problems. Bickering politicians will have to be brought into line by impatient markets – and continued pressure from the rest of the euro zone.

Italian bonds haven’t even enjoyed a post-Silvio Berlusconi bounce. In early trade on Nov. 9, 10-year yields shot through 7 percent, a new euro-era high that takes the country closer to a debt spiral.

Investors would like to see a grand coalition supported by all major political parties and led by a respected technocrat such as Mario Monti, the former European Commissioner. But that’s not going to happen with the wave of a magic wand. For a start, Berlusconi still formally rules until Italy passes the key reforms agreed last month with its euro zone partners. That may take a few weeks, or even longer. Then there will be a dispute on whether to call early elections (as Berlusconi wishes) or to form a coalition (as the opposition wants). The opposition won’t get its way unless Berlusconi changes his mind or his party splits.

The situation is somewhat similar to Greece, where politicians have been wrangling over who should replace George Papandreou, what his mandate will be, how whole-heartedly opposition parties will back the new government and when elections will be held.

National unity governments are a great idea in theory. But there is a risk that what gets cobbled together in both countries will neither be national, unified or capable of governing.

Fortunately, the domestic politicians aren’t operating in a vacuum. Pressure is mounting from abroad: investors, the other euro zone countries, the European Central Bank and the International Monetary Fund. This needs to be maintained in order to bring the politicians to heel. That probably means months of volatile markets and brinkmanship before things settle down – and, of course, with the permanent danger of somebody doing something stupid in the meantime.


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