Mariano Rajoy and Angela Merkel at a press conference where they praised each other’s politics. Reuters.
Echoes of investors’ last-year anxieties over the European Union’s crisis have returned as political upheavals befall Spain and Italy. After months of relative calmness, national politics have regained their ability to agitate E.U. economics, driving markets back to their seemingly everlasting chaotic nervousness.
Spanish and Italian bond yields rose and stock markets plummeted. Spanish 10-year government bond yields rose 24 basis points (bps) on Monday to 5.45%, their highest since mid-December. Italian yields jumped 15 bps to 4.48%.
Spain’s Popular Party government is embroiled in the middle of a corruption storm. Off-the-books payments from a slush fund allegedly involve Prime Minister Mariano Rajoy and other high-level politicians. Rajoy denies any wrongdoing, but he faces pressure to resign from the opposition and civil society. Meanwhile, in Italy, as elections due on February 24 and 25 near, former prime minister Silvio Berlusconi is gaining ground with a populist campaign. Nerves in the E.U are tightening that Berlusconi could return to succeed the European-backed technocrat government led by Mario Monti, and with him all sorts of instabilities.
The main equities indexes in Spain and Italy bore the brunt of the fears on Monday that the euro-zone crisis could be reviving. Madrid’s IBEX was down 3.77% —its biggest one-day fall since the end of September— and Milan’s was 4.5% lower —the most it has dropped in one day since last August. To the north, FTSE 100 suffered its biggest one-day fall in three months, and the euro zone’s blue-chip Euro STOXX 50 fell 3.1 % to 2,625.17, erasing all of its gains for the year.
Ever since Mario Draghi, governor of the European Central Bank, uttered his hostage-to-fortune phrase, “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” confidence has grown among investors that the crisis would be overcome. The other factor that cooled markets was the economic reforms and austerity measures being put in place by debt-hit European governments, with, coincidentally or not, Spain and Italy leading the pack.
Even bad national economic data has until now deflected that view (Spain’s unemployment recently reached a record 26.02%). It seems a long while since the break-up of the common currency was seriously pondered; when their were repeated references to a two-speed Europe and the necessity to adapt to it; or when speeches from European leaders would determine market volatility.
Not even a forthcoming European Union summit had upset investors. This time around, that possibility exists. The Euro-budget summit will be held February 7 and 8 to agree the multi-annual financial framework (MFF) for 2014-2020. Not many have their money on the E.U. closing an agreement.
While uncertainties persist around whether Spain will request s sovereign bailout, the rescue program for Spain’s banks is on track. The E.U. approved a €100 billion ($136 billion) credit line to help the country’s banks in July. Madrid has so far drawn down €39.5 billion and promised broad reforms of the financial sector.
Uncertainty, Europe’s biggest disquiet, has regained its place. Investors are nervous, again. The course Spain and Italy’s politics take over the next several weeks could set the path that the E.U will follow in 2013.
