Clouds of crisis return to Europe

Europe’s brief respite from political and financial turmoil has come to an abrupt halt in the wake of a nerve-rattling Italian election, Britain’s loss of its cherished triple-A credit rating and troubling developments on other fronts.

On Monday, the euro fell to its lowest level against the U.S. dollar in six weeks, but strengthened slightly against the British pound, which was shaken by the credit downgrade announced late Friday by Moody’s Investors Service. The Standard & Poor’s 500 index lost more ground in a single session that at any time since November. Italian bonds plunged and German bonds and U.S. Treasuries rallied, as nervous investors once again looked for safer harbours.

Two unlikely political hotheads – loudmouth comedian Beppe Grillo and Silvio Berlusconi, the aging schmoozer who never says die – turned the Italian election on its head, virtually guaranteeing that the country faces a period of political chaos.

Mr. Grillo, leader of the anti-establishment, anti-corruption Five Star Movement (M5S), and Mr. Berlusconi, Italy’s former prime minister and head of the centre-right People of Freedom party (PDL), accomplished two remarkable things Monday night. They deprived front-runner Pier Luigi Bersani’s best-laid plans for a stable centre-left majority and utterly crushed caretaker Prime Minister Mario Monti’s centrist coalition, one that had won the hearts of investors and European leaders.

The result rocked global markets with fears of a new euro-zone crisis. Europe’s common currency slumped against the dollar and yen and U.S. stocks suffered their biggest one-day drop since November.

It comes at a time when the economy of the European Union as a whole is stagnating and much of the 17-country euro zone remains mired in recession.

Full article: Clouds of crisis return to Europe (The Globe & Mail)

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