Italy halts austerity and increases chaos in Europe

Fears that deadlock will lengthen Italy's two year recession and spill over into the rest of the eurozone hit markets across Europe

Review article of The Guardian 26.02.13 

Italy decided to revive Berlusconi's political career as a withering verdict on cuts and taxes. After three years of austerity leading by Germany and budget cuts aiming to save the Eurozone Italians have spoken. 

Italy's humiliated caretaker prime minister, Mario Monti, meant that the spending cuts and tax rises dictated by the eurozone would grind to a halt, risking a re-eruption of the euro crisis after six months of relative stability.

Despite the withering popular verdict on cuts and taxes, Brussels and Berlin insisted the auterity programme had to be continued in Italy. France and other seized on the outcome for their own purposes, arguing for a relaxation of spending cuts and greater emphasis on policies to boost growth and job creation.

The Italian stalemate combines with tough negotiations over a bailout for Cyprus, being resisted by Germany, worries about the French economy, an unresolved debt crisis in Spain and David Cameron decision to throw Britain's future out of question, making very difficult to take any decission in Europe. 

The European Commision echoed the calls for sticking with the austerity medicine. Italy has the highest debt level in the eurozone after Greece, although its budget deficit is in better shape than many others such as France or the Netherlands. 

Spain, in the meantime, waited anxiously to see what impact the Italian leap in the dark would have on its debt crisis. " This is a jump to nowhere that does not bode well either for Italy or for Europe" said the foreign minister, Jose Manuel Garcia-Margallo, adding he was "extremely concerned" about the effect on Spain's borrowing costs.

Both Berlusconi and Grillo have been harshly critical of the Germans, decried Monti's austerity packages, and have raised questions as to whether Italy, the eurozone's third biggest economy, should remain in the single currency. Grillo has called for a referendum on the matter. 

Berlusconi accused the German government and the European Central Bank, to have conspired to push up the cost of Italian borrowing in 2011 in order to topple Berlusconi and bring in Monti, the technocratic darling of the eurozone elite. 

The turmoil saw Italian bond yields also jump, indicating that any new government will be forced to pay a higher interest rate on its debts.