Tomorrow's summit needs to deliver something for Mario Monti or Italy could be headed out of the euro

06/27/2012 3:29 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The euro debt crisis calendar according to Italy provides yet more evidence that the summit of European leaders that begins tomorrow is make or break for the euro.

By this calendar the technocratic government of Mario Monti has only a month—effectively July--to pass economic reforms and to deliver some kind of short-term relief to the bond market and Italian voters and to head off early elections that could sweep anti-euro politicians into power in Rome.

Like most of Europe, Italy goes on vacation for August—nothing will get done during that month.

When Italian politicians return to business in September, you can expect the current jockeying for position to intensify. Monti’s un-elected government sees its term run out with the legislative elections scheduled for the spring of 2013. But it’s not certain that his government, which took office on November 16, 2011, will last that long. If Monti’s government were to lose a vote of confidence before that, it would be forced to call new elections. Former Prime Minister Silvio Berlusconi’s People of Freedom party has the votes in Parliament to force a no confidence vote and new elections.

The big question is when Berlusconi might decide that early elections are to his benefit. The People of Freedom Party got thrashed in May local elections in Genoa, Verona, and Parma by the upstart anti-euro Five Star Movement Party of comedian Beppe Grillo. Since then Berlusconi sounds like he’s trying out a new campaign message that largely co-opts the Five Star stance on the euro (although not the Five Star Movement’s demand for an end to corruption.) Most recently Berlusconi has called on Germany to leave the euro if Berlin continues to oppose European Central Bank intervention in the bond market to lower interest rates on Italian and Spanish government debt. (You’ll be glad to know that Berlusconi has said that he doesn’t need to be prime minister in any new government. He’d be happy to serve as finance minister.)

If the summit that begins on Thursday ends without offering any short-term relief in the bond market to Italy, Berlusconi would have exactly the opening that he needs to build an early election campaign in which People of Freedom candidates ran against the euro and against Germany.

Why would Berlusconi want an early election? Right now, although the Five Star Movement has been able to win significant votes in local elections, the new party doesn’t have the organization to win enough votes on a national basis to gain enough seats in Parliament to take a lead role in forming the next government. By forcing early elections, Berlusconi could take advantage of the organizational weakness of the Five Star Movement to grab the lead in a new coalition government for his People of Freedom party.

On its track record, a Berlusconi-led government would not to able to deliver the reforms that Germany is demanding as the price of any help for Italy in the bond market. And there’s a good chance that European leaders would see a Berlusconi victory as a sign that Italy had decided to leave the euro.

The best way to head off this possibility is for the summit to give the Monti government enough of a success to head off early elections.

We’ll see if European politicians see the danger and react to it.

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