Voters in Italy, Europe’s fourth-largest economy, elected a government in
deadlock on Sunday and Monday, a setback that will have repercussions for all of
Europe and Israel.
Pier Luigi Bersani led the Center-Left bloc to a
victory in the Chamber of Deputies, the lower house, but failed to win a
majority in the Senate. The Center-Right bloc of former prime minister Silvio
Berlusconi – whom The Economist in 2011 dubbed “the man who screwed an entire
country” for his corruption, economic mismanagement and a playboy lifestyle that
landed him on trial for sleeping with an underage prostitute – turned in a
surprising showing in the Senate.
One factor that blocked a decisive win
was the resounding success of a new protest “non-party” called the Five Star
Movement (M5S), founded by former comedian Beppe Grillo. It won fully a quarter
of all the votes, in part for promising not to aid and abet the old political
Between Berlusconi and Grillo, it seems that Italian politics are
content to blithely careen from one clown to another, while sidelining the
“responsible adults” in the room; despite the nascent reforms that technocratic
prime minister Mario Monti managed to implement during his short time in office,
he received only 10 percent of the vote – a reminder that voters are seldom
partial to austerity.
Because control of both houses is necessary to pass
laws in Italy, Bersani and Berlusconi will either have to team up or eventually
face new elections, leaving heaps of uncertainty in Europe’s largest overall
debt-holder, which is second only to Greece in its debt-to-GDP
Markets reacted sharply to the election results. Italy’s own Milan
stock fell over 4%, while the Dow Jones, London Stock exchange and other
European stocks fell between 1.5-2% each. In Asian trading, the euro’s value
dropped to a seven-week low against the dollar, while the Italian government’s
borrowing costs spiked over two-thirds from last month, reaching their highest
levels since October.
What does all that mean for Israel? For one,
Italy’s deadlock could prolong economic stagnation there and in Europe in
general, which affects Israel through trade by lowering demand for Israeli
goods. On the other hand, it also weakens the euro, which has implications for
Israel’s interest rate.
“In our opinion, the meaning of fear returning
over a euro zone debt crisis is mixed, from Israel’s point of view,” says Ofer
Klein, head of the Economics and Research Department at Harel Insurance and
Finance. “The descent of Europe into recession weakens European demand for
Israeli products. On the other hand, the strengthening of the dollar in the
short run as a result of the crisis produces a positive effect that will help to
mitigate the impact on exports.”
Yet when it comes to setting Israel’s
interest rate, even a relatively stronger dollar might not balance the effect of
a weakened euro.
“The effect on Israel is not a direct one,” explains
Amir Kahanovich, chief economist at Clal Insurance.
“We know that at the
end of the day, the Bank of Israel is worried about the shekel strengthening and
slowing the Israeli economy,” Kahanovich continues, predicting that the bank
will eventually intervene if the shekel gets too strong.
Yet in regard to
the larger concern of the euro eventually collapsing, Kahanovich is
“There is almost no chance of that,” he says. “Nobody wants to
go back to their old currency. The meaning of it would be catastrophic for the
county.” Any responsible leader, he says, would not risk the inflation, balance
of payments crises, loss of investment, and debt challenges that parting from
the euro would entail.
“Leaving the euro zone is economic suicide,” he
says. “Even in Greece we saw that when it got to a really tough situation, it
Far from breaking the Euro apart, Kahanovich says the
trials and tribulations will ultimately lead to stronger European
interconnectedness, as politicians built institutions to overcome their economic
“We can be optimistic, not because the situation is good, but
because the market reacts swiftly to bad decisions,” he says. “The path is
pretty clear, and whatever the politicians don’t do correctly, they’ll pay for
In other words, despite short-term difficulties, the long-run
prospects are good.
On Tuesday, German Foreign Minister Guido Westerwelle
said that “what is now decisive for Italy – but, because Italy is such an
important country for Europe, also for the whole of Europe – is that a stable
government that is capable of acting can be formed as quickly as
The question, then, remains as to how big of an obstacle
Italian politics will present in overcoming those challenges in the short- and