Economic and political aftershocks expected from Italy’s surprise election results

European leaders had a good thing going with Mario Monti leading Italy.

A technocrat committed to the European agenda of austerity and reform, Monti, it was felt, was making progress in getting Italy’s economy back on track.

But Monti and his followers failed to make their case to Italian voters.

“The thing they didn’t explain is why it’s necessary to face the austerity measures in order to stay within the eurozone,” Paola Subbachi, a research director at Chatham House in London, told the BBC.

She says that instead, Italians chose the kind of anti-Europe rhetoric embraced by Silvio Berlusconi’s party, and Beppe Grillo’s Five Star Movement.

“The Five Star Movement expressed the mood of the nation,” Subbachi said. “And I think it’s 60 percent of the nation saying the euro hasn’t been such a good thing. But the thing is that there are no proposals, no policies or ideas on how to move the country out of this deadlock.”

Grillo’s Five Star Movement won the most seats in Congress, but not enough to govern alone. So it’ll need to partner with another group, perhaps Berlusconi’s resurgent party, or perhaps not. No answers have emerged yet.

And so Italy faces a potentially lengthy period of political instability — even more political instability than usual. After all, Italians have gone to the polls more than 60 times since the end of World War II.

But this latest episode comes at critical economic juncture for the country. And the result — political gridlock — is anything but cause for optimism, says Paul Mortimer-Lee of BNP Paribas.

“It’s very bad for Italian growth,” he said. “Firms will delay investment, households will delay big-ticket purchases, foreigners will put less money in Italy, the rating agencies will be wondering if they need to downgrade Italy, and Italian borrowing costs will rise substantially.

“This is going to knock a half to one percent off of Italian growth this year, and this is an economy that is already shrinking,” Lee said.

And that’s not just bad news for Italy, which is the third largest economy in the eurozone, says Johan van Overtveldt, the author of “The End of the Euro.

“Italy is close to 20 percent of the eurozone economy,” he explained. “That means if things start to go really bad there, we will feel it in all the other eurozone countries, but also in the rest of the world as well.”

That includes right here in the United States, where the economic recovery is shaky. Massive budget cuts loom at the end of this week — our own kind of self-imposed austerity measures.

Throw in a new bout of economic crisis in Europe, and you’re bound to get a bit queasy if you’re, say, the chairman of the Federal Reserve, says Steven Englander of Citibank in New York.

“If you’re Ben Bernanke, you’re sitting at the Fed saying, ‘Look this isn’t over, there is the still the potential for negative shocks to come from outside the U.S., and we need this buffer to make sure that our economy, which is just beginning to get its footing, doesn’t get hit by these shocks from abroad,’” Englander said.

In public, most European officials are expressing hope that Italy can form a government, and get on with its reforms.

But that doesn’t sound like something many Italians are interested in right now.

And in other countries that have been through the ravages of austerity in the past few years, there is sympathy. Some in Greece, for example, are now asking — “Where’s OUR Beppe Grillo?”

Anton LaGuardia, with The Economist in Brussels, told the BBC that the Italian election results are a rude awakening for leaders in Brussels and Berlin.

“It’s easier to bully smaller countries like Greece. It’s much harder to bully Italy, because if Italy goes down it’s too big to save, to big to bail out, and frankly too big for the euro to survive the shock,” La Guardia said.

Last summer, Mario Draghi, the head of the European Central Bank, said he would do “whatever it takes” to save the euro.

In a speech Wednesday, Draghi, who himself is Italian, didn’t mention his native country at all.

But he did say that the austerity measures being implemented in Europe are coming “at a heavy social cost.”

And those costs, van Overtveldt says, are giving rise to protest.

“Unemployment is rising — especially youth unemployment — for more and more European countries, and that’s a huge problem,” he added. “It’s to be expected that the anti-European, anti-German mood will be increasing in the coming months.”

Van Overtveldt says that if there’s one other lesson to take away from the Italy situation, it’s this:

The European project — a unified political and economic zone with policies coordinated across dozens of counties — is still far from being a done deal.