Can elections in Italy and Germany derail Eurozone?

José Manuel Barroso, President of the EC (left), receives Pier Luigi Bersani, Secretary of the Italian Democratic Party. (EC Audiovisual services).

With Eurozone’s fiscal consolidation and financial supervision having being concretely scheduled for accomplishment within this year, investors and financial markets relaxed their fears over a possible disintegration of the single money zone and returned even to the Greek bond market. On the political front however still remain some dark spots over two anchor countries Italy and Germany. UK’s plans for a referendum on the country’s position in or out of the EU some-time in 2015 do not pose any serious threat to Eurozones’ developments.

Italian elections

Elections in Italy and Germany though do pose a number of questions. What if Silvio Berlusconi defies public opinion polls and wins the election? However his centre-right coalition is 12 percentage units  behind the undisputable front-runner centre-left under Pier Luigi Bersani, expected to attract 38% of the vote. Berlusconi’s People of Freedom (PdL) lags behind with 26%, Mario Monti’s centre political formation at 16% and Beppe Grillo’s, Five Stars at 13%. All that, according to a public opinion poll published yesterday by La Republica newspaper.

If one wants to divide the Italian political parties in pro-European Union and anti-EU, on this latter category there won’t be any. It’s only Berlusconi who lately appeared strongly against the austerity package introduced by care taker Prime Minister Mario Monti fourteen months ago.

The three times prime minister however went as far as not only to pull down the Monti government and send the country to an early election on 24 and 25 February, but he went as far as to accuse Eurozone for all the economic woes of his country. Berlusconi insists that if Italy had the Lira as national currency, a generous devaluation would have solved all problems. He says nothing though about how Italy could repay its debts with a devalued national currency.

Summing up Italy’s political scenery Pier Luigi Bersani, the leader of Italy’s Democratic Party of centre-left will predictably be the next Prime Minister of the country. He has being steadily supporting Mario Monti’s tough measures during the past year, despite strong opposition at times even from within his own party. Unlike Berlusconi he didn’t change his policy line in the mid of the road, nor he promises easy but fictitious solutions to his compatriots. Seemingly this tactic is winning and Bersani, probably together with Monti will undertake the task to keep Italy in a steady course. This is sine qua non for a smooth return of Eurozone to normality and growth.

The country’s sovereign debt is so large that it has to be self financed. Eurozone could never do for the Italian debt what it did for the three programme countries (Greece, Ireland and Portugal). No wonder why the political news from Italy lies in the background of the latest good performance of all European markets and the rise of the euro with the dollar.

Germany

Let’s pass now to the other general election in a central Eurozone country, the single money zone’s economic powerhouse, Germany. In this election no possible outcome may pose any visible financial or otherwise risk for the entire money zone. Of course on the personal level another win by Angela Merkel will consolidate the applied severe policies on every front, from internal targets for fiscal surpluses to the draconian austerity imposed on Greece. A possible win of the Socialists-Greens coalition wouldn’t drasticaly change the economic policy scenery, but it can lead to a noticeable relaxation of the strict character of the applied measures.

In short the political developments in the single European money zone are not unpredictable. And predictability is at the heart of all financial markets. In this respect the predictable outcome of the Italian elections is at the core of Eurozone future. The extraordinary size of the Italian debt, close to two trillion euro, doesn’t permit any experiments financial or political. As for Germany the country’s political elite has proved it can deliver realistic solutions.