Why Italy Continues to Rain on Europe's Parade

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Supporters and activists from Livorno of the Movimento 5 Stelle, Five Star Movement go by bus to attend the last political rally of Beppe Grillo, leader of the Movimento 5 Stelle before the national election on February 22, 2013 in Rome, Italy.

The streets of Milan where deserted on Saturday night in a blow to the Italian fashion industry which has taken over the city for the annual Milan Fashion Week. While the hotels and bars where buzzing, the Milanese kept out of the rain and had a last think about who to vote for in a nail-biter of an election.

It is easy to say that the outcome of Sunday's and Monday's election has been thrown into doubt by one man, Beppe Grillo. The leading face in the 5-Star movement, Grillo has burst onto the scene and according to a number of private opinion polls seen by CNBC is now second behind the centre-left front runner Pier Luigi Bersani. Officially, there has been a blackout on opinion polls since February 9, but private polls still circulate.

Grillo has said he will not lead the party if it were to win the election because party rules ban anyone who has been convicted of a crime. Grillo was convicted of manslaughter in 1980 after he was involved in a car accident that left three people dead.

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Nonetheless, the 64-year old comedian is definitely changing the game in Italian politics. His rally on Tuesday night in Milan felt more like a rock concert than a political event until the man himself swept onto stage to deliver what, as a non-Italian speaker, I can only describe as an electric performance.

In the only interview Grillo did with any TV station in the week before the election, he told CNBC that his opponents are about to become part of history, even if his party does not actually win the election.

"They're now out of the game, they belong to history…These parties are like old actors acting before an empty theatre. They're the past, in six months we will not even remember them," Beppe Grillo said of his opponents in an interview with CNBC's Julia Chatterly.

"This movement is now unstoppable, it's an epidemic," Beppe Grillo said, adding the other parties had failed to understand the changing zeitgeist in Italy.

(Read More: Are Markets Underestimating Italy's 'Joker in the Pack'?)

"We have to rebuild this country from scratch and to do that we need, the old political class [has] to leave. In peace, because we area constitutional and pacifist movement composed by law abiding citizens, so they should just give up," he added.

One thing is clear from my week in Milan building up to this election, change is in the air. People you meet say there is a battle being fought for the heart and soul of Italian business and that a change of guard is needed if the economy is to grow, following more disappointing data this week showing the Italian economy is contracting at a far quicker pace than its neighbors to the north.

CEOs like the boss of Generali Mario Greco and Intesa Sanpaolo's Enrico Cucchiani are seen as men who can help turn around Italy's economy and reputation with international investors. They've been described locally as "the Germans" because of the time they've spent working in Germany and their seen as part of a new wave of professional managers. In an exclusive interview with CNBC on Wednesday, Cucchiani said he believed 20 percent of Italian firms are set to fail as recession bites.

Those are scary words from the boss of Italy's second-largest bank who is concerned that this will have knock-on effects for the banking industry still smarting from the Banca Monte dei Paschi di Siena scandal, which itself has played a key part in Grillo's momentum in the private polls.

"The top 20 percent of Italian companies in the past three years have seen the top line grow between 35 and 50 percent… but on the other side, unfortunately, the bottom 20 percent has seen top line shrinking 35 to 45 percent, so it's clear that these companies won't make it," said Cucchiani.

"It is going to fuel non-performing loans and that makes banks very reluctant to lend to this sort of company. I don't think the problem is availability of funds, but on the issue of risk selection."

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Sources within the Italian financial industry dispute this analysis claiming the real problem is the banks themselves, or more accurately the powerful trusts that control them. A large numbers of Italian banks set up privatized trusts to help handle the transition from state to private control during the 1990s. These trusts were only meant to handle the transition, but have instead remained in place, years after they should have been disbanded.

"The industrialists who own and control the majority of Italy's economy do not want to give up control," said a business leader who did not want to be named. "If you want to kick start Italian growth,the banks would need to raise capital and lend it to entrepreneurs and consumers which would end up reducing these trusts' control of the major banks across the country."

"The old guard of Italian industry, who have been funding the old guard parties for years would rather have a big slice of a stagnant pie, than a smaller piece of a growing pie."

Italy and its debt markets have been given some time, by probably the most important Italian currently -- Mario Draghi, the President of the European Central Bank. The key to turning Italy's economy around is what the next government does with that borrowed time.

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A recent IMF report claimed Italian gross domestic product(GDP) could be 20 percent higher within a decade if major reforms where pushed through in rules governing professions and in national and local governments, which control assets like Italy's water supply.

Italian business leaders say they will just get on with it, whatever happens in the election, given the lack of political leadership.

Raffaele Jerusalmi, chief executive of the Borsa Italiana, told CNBC that he remained optimistic whatever happens in Sunday's election.

"Whatever the outcome of the election there is not going to be many problems - even if the election result is uncertain,"Jerusalmi told CNBC on Friday as he celebrated the first IPO of the year on the exchange.

"The government we had under Monti was able to improve controls on public finances, and the public debt [picture], so I think we are now in a safe zone."

(Read More: Italian Business Leaders Argue About Election Aftermath)

As CNBC has been reporting all week, the market has potentially underestimated the influence of this weekend's poll. With nearly 50 percent of voters polled backing anti-austerity or anti-European parties,pushing forward with reforms is not going to be easy for whatever coalition is finally formed in the next few days, or potentially weeks.

Taking on the vested interests and old guard will not be easy and will probably require a leader of great vision, cunning and patience. Beppe Grillo is not that man, but he speaks for the millions of Italians sick of the status-quo.

The only Italian I can think of who has that skill currently lives in Frankfurt and runs the ECB and is of course not standing in this election.