by Eric J. Lyman
ROME, March 20 (Xinhua) -- Italian President Giorgio Napolitano began consultations on Wednesday on how to form a new Italian government with stakes being high.
The country now has less than eight weeks to form a new government and select a successor to Napolitano before it faces the unusual prospect of having no elected government and no president. Investors, meanwhile, seem to be taking a wait-and-see attitude toward the negotiations.
Going into the talks Wednesday, Napolitano, who must step down on May 15, said he would explore "all possible roads" in order to broker an agreement that will break the country's political stalemate. But unless center-left leader Pier Luigi Bersani as well as comedian, blogger, and activist Beppe Grillo change their stance, the crisis could drag on for weeks or even months.
The timing is unfortunate. Amid the controversy swirling around the European Union bailout of Cyprus and that country's standoff over a new tax on bank deposits, the political turmoil in Italy only adds to investors' fears that the European debt crisis could flare up again, as it did in 2011.
"If the debt worries returned as strongly as they did in 2011, the consequences could be far worse," said Oliviero Fiorini, an analyst with ABS Securities in Milan.
"Two more years of weak growth in Europe leaves the strong economies less prepared to help out. And investors are already nervous and could easily flee these troubled markets," he said.
A possible Italian debt default remains the worst scenario. Trailing only Germany and France, Italy's economy is the third largest in the euro zone, dwarfing Greece, Ireland, Portugal, and now Cyprus, which have all requested bailout money. In 2011, Europe was feared not to have deep enough pockets to recover from an Italian debt default. It would almost surely fall short now.
For sure, nobody believes an Italian default is imminent. Italian bond yields -- a reflection of investor confidence in the country -- rose after the Feb. 24-25 vote that resulted in the current political crisis, but have since fallen back.
Yields are still higher than they were in late January and early February when it appeared Bersani would emerge from the election as a clear-cut winner, but they are still under 5 percent and no cause for alarm. What is unclear is how long they will remain in that range if a solution is not reached.
Bersani, whose allies have a majority in the lower house of parliament but not in the Senate, has made multiple overtures to Grillo's camp in an effort to form an alliance, but has been rebuffed each time.
Meanwhile, three-time ex-premier Silvio Berlusconi has offered to form what he called a "government of national accord" with Bersani, but has been rejected.
Without a change of heart from Bersani regarding Berlusconi or Grillo regarding Bersani, Napolitano's efforts to find an alignment that will allow Bersani or someone else to form a government appear doomed.
And all this is taking place with the clock ticking: Napolitano's term is expiring. If a government is selected, it will have to elect Napolitano's successor (former prime ministers Romano Prodi and Giuliano Amato are reportedly among the potential candidates for the job). But it will be more difficult for that to happen during the stalemate.
The most likely solution to the quagmire is for the president to appoint a new technocrat government that would push through electoral reforms to make this kind of hung parliament impossible.
But even that solution has its obstacles: such a move would require the president to dissolve parliament. But he cannot do that in his last six months in office, which means before that can happen a new president has to be selected.