The markets are too sanguine about Italy. The country’s politics and economics are messed up, and there are no easy solutions. And although Rome does have the European Central Bank as a backstop, it may have to get to the brink before using it.

Investors had jitters after the election last month, pushing 10-year bond yields to 4.9 percent from 4.6 percent. But by last Friday, they had fallen back to 4.7 percent. Investors have convinced themselves that some political solution will be cobbled together; that if one is not, it does not really matter; and that if worst comes to worst, the European Central Bank will pick up the pieces by buying the country’s bonds.

Mario Draghi, the E.C.B. president, gave some support to the latter two ideas last week. He played down the risks to Italy’s fiscal position by arguing that much of the country’s belt-tightening was on “automatic pilot.” He also made it clear that the E.C.B.’s bond-buying plan was still available for countries that followed the rules.

But messy politics and economics could make each other still messier. Months of political paralysis will squish investment and could dampen consumption. That will exacerbate the recession. Fitch Ratings — which downgraded Rome’s debt to BBB-plus from A-minus last Friday — thinks gross domestic product will shrink 1.8 percent this year. A deeper recession, meanwhile, means a worse fiscal position. The ratings agency expects government debt to reach the equivalent of nearly 130 percent of G.D.P. this year.

Political stalemate also means Italy will not come to grips with its long-term problems. The country has barely grown in the past 20 years. Even Mario Monti’s technocratic government did little to address problems like inefficient bureaucracy, cartels, a dysfunctional legal system and inflexible labor markets.

Without a long-term growth plan, Italy’s debt level may not be sustainable, despite a budget surplus before interest payments equal to about 3 percent of G.D.P. But further belt-tightening would be hard to implement, given the electorate’s reluctance to back austerity. So Mr. Draghi’s automatic pilot may not secure a safe landing.

What solution then is there to paralysis? Participants at the Ambrosetti Forum in Cernobbio last week had three main scenarios: a grand coalition, a minority government and new elections. None looks like a recipe for stable government.

The essential problem is that the Italian electorate split three ways — with Pierluigi Bersani’s center-left party, the Democrats; Silvio Berlusconi’s center-right party, the P.D.L.; and Beppe Grillo’s upstart group, the 5-Star Movement, each gaining nearly 30 percent of the vote. Meanwhile, Mr. Grillo refuses to work with either of the other groups and Mr. Bersani will not form a coalition with Mr. Berlusconi.

The electoral system makes things worse. It has given the largest grouping, the Democrats, a majority in the lower house of Parliament, but nobody is in control of the upper house. A majority is needed in both houses to govern.

Optimists say it may be possible to form a grand coalition if Mr. Bersani and Mr. Berlusconi make way for new leaders. Matteo Renzi, Florence’s young mayor, who lost to Mr. Bersani in the Democratic primary, would be an obvious choice. In an opinion survey last week by the polling institute SWG, Mr. Renzi was the favorite to be prime minister, with a level of support of 28 percent compared with 14 percent for Mr. Bersani, 13 percent for Mr. Grillo and 10 percent for Mr. Berlusconi.

The snag is that Mr. Renzi does not have support either in Parliament or in the Democratic Party machine. What is more, a grand coalition could easily collapse in bickering. Time would have been wasted, and Mr. Grillo would be well placed to lead the biggest group in a subsequent election.

Some observers think that would not be too bad. After all, the former comic wants to give the political system a much-needed shake-up. The snag is that Grillonomics is pretty scary. Mr. Grillo is advocating a 20-hour workweek and restructuring of Italy’s debt. He is also playing with the idea that Italy should quit the euro.

If a stable government cannot be formed, aren’t new elections the solution? The problem is they would probably produce another stalemate. The best hope for breaking that would be if Mr. Renzi were the Democrats’ candidate.

But even that might not work. Although he appeals to the center ground, some of the Democrats’ left-wing supporters might peel off to more extreme parties.

Another hope is that a minority government, led by Mr. Bersani, could somehow hang on until the tectonic plates shifted enough inside Parliament for a grand coalition to be formed. But Mr. Bersani will struggle to get such a minority government up and running. Even if he does, it is likely to collapse, having achieved nothing except wasting time.

Optimists hope the voting system can be changed before a second election. But even that seems unlikely. Although Mr. Bersani, Mr. Berlusconi and Mr. Grillo all want a new system, they have different ideas on what it should look like.

The most likely scenario, then, is that Italy will be forced into a second election that will still produce no clear winner. If the 5-Star Movement is the largest party, markets could panic. If one of the other two comes out ahead, there will have to be renewed discussions of a grand coalition. Even then, a further rise in bond yields may be needed to knock heads together. Meanwhile, the recession will drag on and the fiscal position will worsen. Not a pretty picture.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/03/11/business/global/11iht-dixon11.html?partner=rss&emc=rss