Austerity No More?

    The elections held last week, the Italian electorate voted overwhelmingly against the austerity policies of outgoing Italian prime minister Mario Monti.  The political coalition headed by Mr. Monti received only 10.5% of the popular vote, while the two candidates who promised to reduce the EU-mandated reforms, former prime minister Silvio Berlusconi and populist Beppe Grillo, received more than 55% between them.  Their strong performance in the election, as well as the street protests in Spain and Greece, are clear signs of the growing anger in Southern Europe toward the EU-sanctioned economic policies.  The Financial Times over the weekend noted that much of the current political upheaval was anticipated by leaders fighting the crisis.  IMF officials acknowledge they have intentionally “front-loaded” reforms in bailout programs because of the political fatigue that inevitably sets in.  Mr.  Monti, in a speech after the Italian election, stated that it will be important for the EU to find ways to show voters that their sacrifices are bearing fruit.  We worry that it will be hard for politicians in Italy and Spain to stay the course of economic reform in the face of weak economic growth and high unemployment.  Any sign of those countries beginning to roll back reforms could upset the current unwritten arrangement that the ECB will buy the debt of countries that push through tough austerity measures.  If Spain and Italy do, in fact, move away from their austerity programs, it could lead to an increase in volatility that is not currently anticipated by the markets.