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European leaders reiterate pledge to austerity following Italian vote

In light of the recent drama surrounding Italy, culminating in a political deadlock and anti-austerity vote, European leaders insisted that euro members soldier forth with budget cuts to mitigate and even the debt crisis across the continent. Indeed, finance ministers from the 17-member single-currency bloc are scheduled to meet in Brussels today to discuss such issues, which even include a bailout for Cyprus. In Rome, a top aide to Democratic Party leader Pier Luigi Bersani noted the country may need to hold another election this year after passing new electoral laws.

“Now in Europe, after the Italian election, it seems to be a case of either austerity and savings programs or growth, but that’s a completely false premise,” German Chancellor Angela Merkel said at March 1 event. Moreover, EU Economic and Monetary Affairs Commissioner Olli Rehn reiterated those comments during the weekend, suggesting there’s no scope for the bloc to let up on budget discipline.

Perhaps more worryingly, Italian political instability in the aftermath of last week’s election ended in a four-way split, threatening to reignite concern about the deepening of the debt crisis. Voters in the bloc’s third- largest economy revolted against German-inspired austerity measures, handing the party of comedian-turned-politician Beppe Grillo more than 25% of the vote with its anti-spending cut message and a call for a referendum on euro membership.

Italian 10-year bond yields climbed to a three-month high last week, jumping 34 basis points to 4.79%, rising higher as of this morning. However, Spanish bonds rallied last week along with Greek and Portuguese securities on speculation that the European Central Bank, which eased a market panic last year with a pledge to buy sovereign debt, will maintain firm control over the three-year-old debt crisis and prevent further destabilization.

Any “significant” attempt to unravel Prime Minister Mario Monti’s reforms would risk “serious turmoil across Europe,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a note today. “Our base case remains that Brussels, Frankfurt and Berlin jointly with the bond vigilantes will simply leave Italy no choice but to stay on the straight and narrow -- or at least to not go astray for very long.”

Italian President Giorgio Napolitano told political leaders March 2 to put public interest and the country’s international reputation first as Grillo reiterated that his party, the 5 Star Movement, won’t back any government. Bersani, whose faction won the most votes, is resisting cooperation with former premier Silvio Berlusconi or Grillo’s upstart movement.

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