Tuesday, February 26, 2013

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The Italian Elections in European Perspective

The results of the Italian elections, although not far from what polls had predicted, have shocked the world, and especially the world's financial markets. Set in a broader context, I take the Italian electorate's repudiation of Mario Monti and "the European consensus" as one sign among many that that consensus is coming apart at the seams. Consider the following:

1. Meanwhile, in the north, France has been rebuked for failing to reduce its deficit under Hollande, and another year of no growth is forecast, while the UK has been downgraded. Yet despite the failure of the austerity program to deliver the promised results anywhere, no one in power has yet dared to breathe word of an alternative. Last May, there was hopeful talk that Hollande would join with Monti to mount an anti-austerity offensive, but Monti's fate is now sealed, and Hollande, though now securely in power, barely even pays lip service to the pro-growth agenda that he dangled in front of voters as an alternative or companion to austerity. His response to Europe's scolding was simply to whimper that, given time, he would find a way to cut the budget.

2. Austerity has not failed to produce certain kinds of "adjustment." The unit labor cost gap between Germany and the rest has shrunk significantly, more because of higher wages in Germany (as Germans will insist to you at the drop of a hat) than because of wage cuts in the south. And yet this adjustment has improved the current account picture only marginally and placed such a drag on demand that growth seems even more out of reach now than it did a year ago.

3. None of this bad news is really news, nor have the monitory signs been invisible for quite some time now, yet the financial markets have treated the Italian elections, whose results were more or less accurately predicted, as a "shock" worthy of triggering major price movements world-wide. Conclusion: "Denial" is not confined within the borders of Egypt.

4. As comical as the conjunction may seem, the Italian elections plus the American "sequester" may suffice to awaken the complacent from their dogmatic slumbers to trigger a mini-panic. Hold on to your hats. I'm too old to relive October 2008, and it probably won't be that bad, but I foresee considerable carnage and a return to crisis-a-month Europanic.