T was always too good to last.
IScarily, the tentative calm in the eurozone since last summer is fragile enough to be blown away in an instant by a hung parliament in Italy -- a country boasting 63 governments since the Second World War.
Reality, finally, has bitten.
Barring an unlikely "grand coalition", new elections could be three months away if the political horse-trading fails. That's an awfully long time if you bought into the New Year rally and decided to load up on peripheral sovereign debt. Default risks have spiked and the safe-haven trade is back, driven by yet another inconvenient democratic intervention: a resounding noconfidence vote in austerity. In the US, another damaging political impasse threatens as $85 billion of entirely preventable spending cuts kick in tomorrow under "sequestration", dragging down the world's biggest economy.
Presumably the Italians voted in their millions for comedian Beppe Grillo on the basis that he can't do any worse damage to an economy which has shrunk for seven successive quarters, creating a jobless rate of 11.2%. But more worrying for European Central Bank president Mario Draghi, the resulting bond sell-off raises doubts over his "guaranteed" backstop for the eurozone: the "big bazooka" of Outright Monetary Transfers unveiled last summer.
The mere possibility of unlimited ECB cash being thrown at sovereign debt was enough to quell turbulence, but the largesse depends on elected politicians signing up to a career-threatening bailout programme involving strict conditions and painful reforms. Leaving aside the fact that in Italy there is no government, and hence nobody to request aid, the strength of the anti-austerity vote gives no mandate to economy-sapping reform, even though the tanks of monetary union are already revving up to crush democratic protest. EU president Herman van Rompuy talked about "respecting" the election results, and in the next breath said Italy has "no real alternative" to the pain. Without reforms, there's little chance of the ECB turning on the taps in the bond market. …