The Next Election to Obsess Over: Italy

An election six months and an ocean away is of crucial importance to the global economy.

Italy's Prime Minister Mario Monti, speaks during a Spain-Italy Forum at American House in Madrid, Spain, Oct. 29, 2012.
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For people who can't get enough of high-stakes elections, November 6 didn't have to be the end of the excitement. Italy's elections are coming in April 2013, and the outcome is going to be crucial to the future of the ever-shaky Euro zone — and therefore the global economy.

Economist Mario Monti has served as prime minister since 2011, when he was brought in to lead a technocratic regime charged with solving the country's ever-growing debt crisis. He and his government have succeeded in putting austerity measures and labor market reforms into place. Though the country's debt continues to rise, yields on Italian bonds (and, thus, the nation's borrowing costs) have fallen considerably over the last year. But Monti's term is up in 2013, and the next prime minister — not to mention the next parliament — may not be as concerned with fiscal responsibility as Monti.

One European expert puts the election on the same level as another coming crisis: "Really in the short run, there are two things looming: one is the U.S. fiscal cliff and the impact of it, and the other is the Italian election," says Scheherazade Rehman, director of the European Union Research Center at George Washington University's School of Business. Whether or not the Euro zone crisis escalates in 2013, she says, will depend upon the outcome of the election.

[READ: What Happens if Italy's Economy Collapses?]

Pier Luigi Bersani, head of the country's Democratic Party, has promised to relax austerity if he should be the prime minister. And the new Five-Star Movement, led by comedian Beppe Grillo, has shown surprising success, winning Sicily's regional elections in October. Grillo said earlier this month that Italy "cannot afford to remain in the euro," as Bloomberg Businessweek reported. That party's success may suggest that a significant faction of the population is fed up with efforts to bring Italy's spending down in order show the E.U. that it is committed to austerity.

Why does it matter? As Rehman puts it, Italy is both "too big to fail and too big to save," as it is the world's eighth-largest economy, with a debt-to-GDP ratio of roughly 120 percent. If Italy's debt spiralled out of control, it could have massive consequences not only in Europe but the global economy. Aside from crippling European growth, it could also hurt banks worldwide that are exposed to Italian debt. At the same time, she believes, the IMF doesn't have the firepower to bail the country out.

Even if austerity is good in the long run, it creates pain in the short run, giving politicians a way to appeal to unhappy voters. Cutbacks have led to protests and even riots in Italy as well as other E.U. countries.

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Still, Monti's policies remain popular, at least among many in the political establishment, says one expert.

"There's a sense among the mainstream parties that this experience should continue, regardless of who will be leading the new cabinet following the elections next spring," says Domenico Lombardi, president of the Oxford Institute for Economic Policy.

It's not just his policies that could remain in place. While Monti said earlier this week that he would not like to stay in the job, he also said that he would stay for another term if he were reappointed. It is widely believed that, if no party comes out a clear winner in April, Monti could be reappointed. And a reappointment could mean a reinvigorated zeal for keeping the budget on track.

[OPINION: America Needs Leaders Like Italy's Monti]

"The government would have a fresh political mandate, but at the same time, a reappointment of Mario Monti would signal there is no negotiating, no flexibility in terms of achieving macroeconomic stability," Lombardi says.

That macroeconomic stability is a long way off, says Rehman, who believes that Italian economic growth will be painfully slow for at least five more years. And in her opinion, that means there is a clear best-case scenario for April's outcome: "It's not time for him to leave."