Uncertainty returns to euro zone with loss of steady Monti
ANALYSIS:The political turmoil in Rome has spurred concern in Europe that Italy might swerve away from the reform and austerity agenda of outgoing technocrat premier Mario Monti.
Although Monti’s tax hikes are deeply unpopular with many Italians, his steady hand since replacing the ousted Silvio Berlusconi a year ago helped restore a semblance of investor confidence in the country. The risk remains that any deviation from fiscal rectitude during the election or after it could prompt a renewed market onslaught.
This would herald danger for all euro zone member states, with enfeebled countries such as Ireland among the most vulnerable.
An absence of market volatility is one of the main preconditions for Dublin to make an unhindered return to private debt markets next year.
The chaotic dying days of the last Berlusconi administration marked some of the worst moments in the three-year debt crisis; no one in Europe wants to contemplate a return to the brink of the abyss.
“When I was installed in power 13 months ago, there was European, American and global interest in the Italian situation because we could have led to the definitive break-up of the euro zone,” Monti said on Saturday before his resignation. With the ever unpredictable Berlusconi back in the fray, the unfolding drama is under close scrutiny outside Italy.
European Commission chief José Manuel Barroso warned yesterday the country was still in the danger zone and nothing should compromise the reform effort. “The next elections must not serve as a pretext for putting in doubt how indispensable these measures are,” he told Italian newspaper Il Sole 24 Ore. “The relative calm on the markets does not mean we are out of the crisis.”
The European Central Bank’s message was the same. “Whoever governs Italy, a founding member of the EU, is going to have to pursue this course with the same seriousness,” ECB executive board member Jörg Asmussen told Germany’s Bild.
Italy is, after all, the third largest euro zone country. Like Spain, the country is both too big to save and too big to fail. There simply would not be enough money for any rescue programme; yet any failure to refinance Italian debt could sink the single currency altogether.
Italian 10-year borrowing costs were at an unsustainable 7 per cent when Mr Monti took over and they remain markedly down from that elevated level. Still, rumblings last week of Berlusconi’s return and anxiety about the threat that posed to Monti helped push the 10-year interest rate more than 10 basis points higher in three days to 4.56 per cent.
With some of the sting taken out of the crisis since the ECB unveiled its bond- buying programme in September, the latest ructions in Rome have brought forward an election that could have a profound bearing on the euro zone at large.