Coalitions

Angela Merkel, having won a third term last weekend as Chancellor of Germany, but not a majority of seats in the Bundestag, is now busily negotiating with parties of the center-left to form a governing coalition, a process that could take weeks. In her role as de facto leader of Europe, however, this may not be the only coalition with which she needs to concern herself.

Italian Prime Minister Enrico Letta was forced to return - abruptly and embarrassingly - to Italy last week from the UN General Assembly meeting in New York. (He was, among other things, courting investors desperately needed to continue the financing of Italy's massive public debt.) Seems Silvio Berlusconi's center-right party (PDL) was once again threatening to pull out of the fragile coalition government, formed with Letta's center-left party (PD) after last February's deadlocked parliamentary elections. Berlusconi, convicted of, among other things, tax fraud, may be stripped of his seat in the upper house at a special Senate committee meeting on October 4, and if this occurs, PDL members have indicated they will walk out en masse in protest. Already, Berlusconi has ordered his five Ministers to resign from the government, in apparent protest against a planned increase in sales tax, part of broader government policy to reign in the public debt. Prime Minister Letta has called this Berlusconi-inspired reasoning a "huge lie", strong language, especially for Mr. Letta. Unless the 88-year-old President Napolitano can once again bring together the various political factions - as he did masterfully last April - Italy's 64th government since WWII will collapse next week following a scheduled confidence vote.   

The long process of fixing Italy may thus be put on hold, again. The immediate concern is that Italy faces another downgrade of its government debt; the Milan bourse dropped last week, and borrowing costs on benchmark 10-year bonds rose on Friday to their highest level since the beginning of the summer. But the more fundamental, pan-European concern is that, as the difficult political haggling continues in Berlin to establish a stable governing coalition for Germany, and as governments in Greece, Spain, Portugal and Hungary face the on-going challenges of restoring stability, another political impasse in Italy, with an accompanying economic implosion, could at the very least render considerable pressure on the euro, testing the resolve of the European Central Bank.

Reports of the demise of the European crisis are, thus, greatly exaggerated.