Eurozone crisis about to return with a vengeance as Italy and Spain vote out austerity?Posted on 04 February 2013 with no comments from readers
The Italian general election on 24-25th of this month and a political scandal over the Spanish prime minister’s slush fund threaten an end to the latest period of calm in the ongoing eurozone sovereign debt crisis, with a rejection of austerity and a challenge to the bond markets.
This has been the pattern of the past three years in Europe: intense periods of crisis with media headlines predicting the end of the world and then a cabal of European leaders stitches up some solution behind closed doors that assuages market fears and brings bond yields back into the comfort zone. Are we about to go back into the firing line?
The surge in support for firebrand ex-premier Silvio Berlusconi, running on an anti-austerity ticket is worrying indeed. He blames former prime minister Mario Monti for a dangerous recessionary spiral caused by unnecessary austerity. Rising unemployment in Italy and the relative calm in Germany plays into his populist hands.
Meanwhile in Spain premier Mariano Rajoy’s crown has slipped badly after a round of allegations about kick-back payments from construction firms winning state contracts. Polls show 60 per cent of Spaniards do not believe his denials and 800,000 have signed a petition calling for his resignation.
In a country where 58 per cent of people under the age of 25 are unemployed the legitimacy of democratically elected politicians can be quickly undermined by such scandal which becomes a proxy for a reaction against the austerity program of the same government.
At the same time it is not hard to understand why the public in Italy and Spain is upset by austerity when they see Germany still basking in relative economic calm with low unemployment and recruiting their workers.
However, a renewal of the eurozone sovereign debt crisis is the last thing the authorities want to see in Europe. Bond markets will not like this one iota. This will also upset the fragile progress that has been made in creating a federal banking structure able to withstand future financial shocks.
Mr. Monti has been widely credited along with ECB president Mario Draghi for bringing the eurozone crisis under control, and that would clearly be undermined by the return to power of Mr. Burlusconi who got Italy into its current mess in the first place. Mr. Rajoy has also done a good job in very difficult circumstances if you see it from the global perspective.
The problem is that democracy and austerity are unhappy bedfellows. Do you vote for your own unemployment? That is a sacrifice too far for many to make.