Six weeks after elections in Italy, the three main blocs centre-left, centre-right, and a populist group led by a comedian have made no progress towards establishing a government. President Giorgio Napolitano has set up two committees of wise men' to come up with reforms that might be widely acceptable.
Italy needs to bolster its long-term growth rate through structural reforms in order to make a start on reducing its huge debt pile, which is heading for 130% of GDP.
It's hard to be optimistic, said Capital Economics. The main parties are hardly "natural bedfellows", so even if they were to agree on the needed reforms, the administration could well collapse before the reforms were complete. "Italy has become ungovernable," said Nicholas Spiro of Spiro Sovereign Strategy. "It is suffering from a toxic mix of political stalemate and economic depression." Fresh elections may come soon.
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In which case, the single currency is in danger, said Larry Elliott in The Guardian. Former prime minister Silvio Berlusconi is leading opinion polls as his anti-austerity rhetoric is striking a chord. You can see why. Italy is suffering its longest recession since modern records began in 1960. GDP is on course to fall for a seventh successive quarter.
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So it's "not hard to sketch out" the following sequence of events, said Elliott. Berlusconi wins by cashing in on the growing anti-austerity mood, frightening investors and sending bond yields soaring. In that case, the European Central Bank is supposed to ease default fears by buying up unlimited quantities of bonds, lowering yields.
But the bond buying is supposed to happen in return for austerity or reforms. Berlusconi's government could refuse, and call a referendum on Italy's single currency membership. Investors, said New York University's Nouriel Roubini, should be "worrying much more" about Italy.
