Election outcome is product of deep-felt discontent with EU's handling of crisis

Analysis:Reforms instigated by Monti may be derailed. This is not what Brussels wants

From a European perspective, Italy’s elections have delivered the least favourable outcome. Mario Monti, the former EU commissioner who brought a dose of sensible, deficit-reducing measures to the Italian people, has finished in fourth position, while the inconclusive result opens the door to months of potential political paralysis.

Economic stagnancy

In many ways it was always going to be this way. While 2012 succeeded in containing the immediate threat of another sovereign debt crisis, the focus of Europe’s economic crisis has now shifted to the social and political ramifications of prolonged economic stagnancy. Ever since the scandals surrounding Spanish prime minister Mario Rajoy erupted earlier this year, there has been a sense that political instability, and not a sovereign debt crisis, could be the main threat to Europe’s recovery.

That fear appears to have been borne out by the Italian elections.

Financial markets have taken fright from the election result, spooked that the badly needed economic and budgetary reform plans instigated by Monti and prescribed by Europe will now be derailed.

The Italian elections have shown what happens when a collective, pan-European policy approach is confronted with an expression of national democracy. It also reveals the inherent difficulties of implementing a cohesive, top-down economic policy on specific nations, even if that economic strategy is the correct policy response.

Bad timing

The timing from the perspective of Brussels was also unfortunate. Just last Friday, EU economics and monetary commissioner Olli Rehn unveiled the European Commission’s winter economic forecast, which painted a bleak picture of the European economy. The euro zone is expected to contract further in 2013, with unemployment rising to 12.2 per cent on average, worse than expected. The figures gave further fuel to the critics of Europe’s so-called austerity policy.

Asked yesterday whether Italian voters’ apparent rejection of Europe’s austerity agenda will force Europe to reassess its economic policies, EU officials stood firm. “We’re convinced that by continuing to make these efforts, the Italian economy can restore the growth and create jobs,” a spokesman said, adding that while the fiscal adjustment measures had not yet had a positive effect on Italy’s debt levels or unemployment, they had improved Italy’s competitiveness and deficit position.

The commission also confirmed it has full confidence Italy’s fiscal consolidation path will continue under the new government. “We’re confident in Italian democracy. We’re fully confident that it will continue along this path,” a spokesman said. It may have a point.

Despite the anti-austerity promises of some of the electoral candidates, the reality of power may be somewhat different. According to some observers, French president François Hollande among others has been forced to temper his pre-election anti-austerity policies in the face of political and economic reality.

Central force

Nonetheless, the result of the Italian election is a serious concern for the EU. Italy is an enormous figure on the European landscape, and not just economically. As well as its status as the fourth-largest EU economy, it has historically been a central force in the European project. It was one of the six founding members of the EEC in 1957, and has traditionally been one of the more pro-EU countries.

Europe may try not to take the Italian election personally, but the reality is that the result, among other things, is a commentary on the European policy response to the economic crisis.

Italy has spoken; the question will be how far Europe is prepared to listen.