Published in Insights, The New Zealand Initiative’s newsletter, 1 March 2013

Lasciate ogni speranza voi ch’entrate (“Abandon all hope, ye who enter here”) is written above the gates of hell in Dante Alighieri’s Divine Comedy. Following last weekend’s elections, this gloomy admonishment might fit Italy as well.

The left-wing bloc of Pier Luigi Bersani may have narrowly won the Chamber of Deputies, but his political rivals now control the Senate. Billionaire ex-Prime Minister Silvio Berlusconi arose from the political dead, and coming out of political obscurity with a radical protest agenda, ex-comedian Beppe Grillo received about a quarter of the vote.

Summing up the mess, Il Secolo XIX newspaper’s front-page headline read Un’Italia ingovernabile.

So Italy is ungovernable and you may ask yourself what else is new. Actually, this time Italy’s political crisis really matters. And not just to Italy.

Just when many commentators thought the euro crisis was over, Italy’s political earthquake has put it back on the agenda. The problem is not so much that it is practically impossible to form a stable government with different majorities in the two houses of parliament. The real issue is that the anti-austerity forces in Italy have won a large majority.

Technocrat Prime Minister Mario Monti, who resigned in December, was the only politician promising to continue Italy’s economic reforms. He received a mere 10% of the vote. Bersani’s support for such measures was lukewarm, while Berlusconi and Grillo actively campaigned against them.

However, to qualify for more support from its European neighbours to deal with its debt problem, Italy needs to commit to further reforms and spending cuts. But it is clear that such policies do not have the support of the Italian public. Nor do they have a chance of being passed in parliament.

This situation is a severe dilemma for Europe’s politicians and central bankers. On the one hand, they cannot continue to bail out Italy if the Italians are no longer willing to do anything in return. On the other hand, they cannot afford to let Italy fail and plunge into economic chaos. After all, it still is the third-largest economy in the Eurozone.

For the troubled Eurozone, this means its crisis is not only back but worse than before. And it may be the beginning of a next stage. Following the Italian example, Spain and Portugal may also reject the European Union’s austerity and reform dictate.

Nobody knows what will happen then. One thing is clear, though. For the foreseeable future, Europe remains perhaps the biggest downside risk to the global economy. Lasciate ogni speranza.