Europe, Italian-Style

MILAN – Last summer, after two years of growing uncertainty, systemic risk in the eurozone finally began to wane, as conditional commitments came together. Italy and Spain offered credible fiscal and growth-oriented reforms, and the European Central Bank, with Germany’s backing, promised intervention as needed to stabilize the banking sector and sovereign-debt markets.

Unfortunately, that trend may be reversing. Growth in the eurozone has turned negative overall, significantly so in the south. Unemployment stands at about 12% in Italy, and 38% for the young. Likewise, Spain’s unemployment rate is above 25% (and 55% for young people). And French economic indicators are slipping quickly.

Meanwhile, the outcome of Italy’s election will most likely leave the country – the eurozone’s third-largest economy and the world’s third-largest sovereign-debt market – without a stable government. As a result, it will be difficult to sustain a reform program that is vigorous enough to satisfy the ECB and the eurozone core.