Judging by the panic that seized financial markets on Monday and carried over into European stock and bond trading on Tuesday, the answer seems to be no.
After months of calm, investors are nervous, and not only because Italy again seems to have become ungovernable after an inconclusive political election. They are also worried because voters in Italy, the euro zone’s third-largest economy after Germany and France, soundly repudiated government austerity policies that the region’s leaders have long embraced but that have hampered growth in Italy and elsewhere in the euro currency union.
By supporting a protest-vote candidate, the comedian Beppe Grillo, and backing the return of former Prime Minister Silvio Berlusconi, who has vowed to reject austerity, Italians appear to be embracing a return to nationalism, experts say.
Swept aside by the Italian elections was the technocratic government led for the last 13 months by Mario Monti, who has been crucial to an unwritten accord: the European Central Bank promised to help contain the financial contagion that was threatening the euro zone as long as political leaders like him made headway in improving their economies.
The upheaval in Italy means that other euro zone leaders may no longer have a reliable partner in the drive to create a more durable currency union and that Rome’s voice in making European policy will be diminished, for now at least.
“This brings back all the political risk issues” that had seemed to fade from the euro zone, said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.
On Tuesday, stocks fell across Europe, with the Euro Stoxx 50 index, a barometer of euro zone blue chips, down 3.1 percent. Investors also continued to dump Italian debt, pushing up the yield on the 10-year sovereign bond 40 basis points to almost 4.9 percent. Portuguese, Spanish and Greek bond prices also fell. Perhaps most significant is the role of the European Central Bank in this period of renewed euro zone uncertainty. The bank rode in as a white knight in September by agreeing to buy large amounts of bonds from countries with shaky finances, including Italy, to calm a contagion of fear then sweeping the euro zone. The bank, run by Italy’s former central banker, Mario Draghi, vowed to do “whatever it takes” to hold the euro union together.
The issue now, experts say, is that Mr. Draghi’s promise was based on an implicit trade-off with euro zone governments. If countries agreed to conditions intended to make their economies perform better, the central bank would buy their bonds to hold down market interest rates.
So far, the bank has not bought any bonds. The mere commitment to do so has been enough to reassure international markets. But Italy’s new political turmoil might prompt investors to test the central bank’s resolve. If so, many experts doubt that the bond-buying program is workable — for Italy, at least.
“Without a stable government, it will be hard to qualify” for the program, said Lucrezia Reichlin, a former director of research at the bank who is now a professor at the London Business School. “Draghi has to have somebody to talk to.”
Europe’s debt crisis is not nearly as dire as it once was. Although Italy’s borrowing costs, as measured by its 10-year bond yield, hit a three-month high on Tuesday of nearly 4.9 percent, that is still nowhere near the 6.5 percent danger zone of last summer.
And despite renewed fears of instability, no one is talking about a breakup of the euro zone — as might have happened last year if such political uncertainty had troubled one of Europe’s most crucial economies. A shift in sentiment took hold last autumn after Mr. Draghi and European politicians, led by Chancellor Angela Merkel of Germany, made clear that the euro union was here to stay — no matter what.
But experts said the Italian vote served as a warning shot that a new round of political instability could be coming in the neighboring large economies of Spain and France. Their leaders have also adopted austerity programs to keep the euro debt crisis from engulfing their economies, despite concerns that the programs are impeding the economic rebound that might help them grow their way out of financial distress.
Liz Alderman reported from Rome, and Jack Ewing from Frankfurt.
Article source: http://www.nytimes.com/2013/02/27/business/global/italian-deadlock-rekindles-anxiety-about-euro-zone.html?partner=rss&emc=rss
Speak Your Mind
You must be logged in to post a comment.