David Frum

02.26.13

Will the Euro Survive?

DANIEL ROLAND/AFP/Getty Images ()

Despite Euro elite expectations, Italian voters have not meekly submitted to foreign-imposed austerity.

Italy’s political class was left reeling after the upstart anti-establishment Five Star Movement, founded only three years ago by the comedian-blogger Beppe Grillo, garnered 25.55 per cent of the votes, the largest share for any single party.

But the nation was torn three ways between Mr Grillo and his band of political novices, Pier Luigi Bersani’s centre-left coalition and Silvio Berlusconi’s centre-right alliance, raising the prospect of a second election within months.

Markets have reacted badly.

Investors took fright at the prospect of prolonged political instability in Italy following a resounding electoral rebuff to austerity measures, with a spike in bond yields and sharp sell-off in equities.

Yields on 10-year Italian debt shot up by 44 basis points to 4.92 per cent, before falling back to 4.7 per cent as markets digested election results that leave little hope of any party mustering a governing majority. The spread over Bunds rose to 347 basis points and then dropped to 335bp.

Talk to Euro thought leaders and they keep telling you their grand currency project has been saved. Not so fast.