Author: Walter Russell Mead

Few in Europe are happy to admit it, but Italy is looking disturbingly similar to Greece these days. Mass youth unemployment, an over-regulated bureaucratic economy and a shaky financial sector have crippled the fiscal health of both countries; both now face a future of austerity and stagnation. And the similarities became even more pronounced late last year, when technocratic governments (charged with implementing European policies) replaced popularly elected leaders in both countries, becoming caretakers until the next election.

For the Greeks, that election was chaotic. The center-right New Democracy party won a victory that wasn’t really a victory, failing to achieve a majority and setting the stage for fringe parties to gain even more in the next election. Greece faces the prospect of divided, fractious government for years to come, and investors are running scared.

Italy now appears poised to follow suit. The FT reports that the major parties of the center-right and the center-left lost seats in recent local elections to representatives of a motley assortment of anti-bailout, anti-Europe parties, ranging from fly-by-night novelty acts to hard leftists:

The local elections indicated that the Democrats, who also support Mr Monti in parliament, would be dependent on a coalition with smaller, more leftwing parties opposed to the technocrats if they are to win next year’s general elections.

This raises the worrying prospect for financial markets of a fractured left-leaning government divided over economic policies. Another possibility is that the weakness of the Democrats and Mr Berlusconi’s centre-right party could drive them in the direction of forming a “grand alliance” that would ask Mr Monti or a similar technocrat figure to take the helm.

Italy is a much bigger potential problem than Greece. If a Greek meltdown merely threatens to wreck the Eurozone and economies of its larger neighbors, an Italian collapse all but guarantees that outcome. Italy’s general elections are not until next year, but if the major parties continue to lose ground to the fringe, there could be some nasty surprises ahead.

 

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