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Mario Monti is off, and Silvio Berlusconi hopes to return. This news was bound to rattle markets, even if it only means elections will come a couple of months earlier than previously planned and even if Berlusconi's chances of winning are slight.
The problem is that Monti's technocratic regime succeeded only superficially in restoring a sense of calm in Italy. While he was in office, the eurogroup's official script – that a reform programme would be rewarded, if necessary, by monetary medicine from the European Central Bank – was comforting.
But liberalisation of markets and a dose of austerity hasn't achieved much on the ground. The debt-to-GDP ratio is heading to 130%, the country is still in recession, industrial production is down and unemployment is rising. Those cold facts will be harder for investors to overlook when Angela Merkel's favourite Italian is no longer in power.
But it is Spain, not Italy, where the pressure is likely to be felt first. Spain's recession is deeper, its banks more dysfunctional and its unemployment rate more severe. The question for Madrid is how long it dares to delay in summoning ECB support. The calculation was already tricky since it's best to go before markets force the issue. Monti's departure, raising the threat that markets lose confidence in southern Europe again, complicates the issue yet further.
