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Euro Crisis: Coming Your Way Again Soon?

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Equity investors celebrating the rise in markets this year could have been forgiven for expecting at least a quarter's grace. But it was not to be – Italy's general election result has seen to that and carries some profound implications for the future of the single currency.

First of all, it suggests that voters have no stomach for "austerity" (if ever a course of action was mis-named, this is it!) and so will not elect to retain politicians who try to enforce it. But without transparent cuts to the current level of public spending, it will be less likely that the German government leadership will countenance any further underwriting of the euro project. At which point the currency falls over.

We are some way from that, but past the butterfly wing flutter leading to the typhoon. Italy's domestic politics will take a few weeks to work itself out, but even after a government is formed there will be enough uncertainty to spook markets – uncertainty on the future path of the country's public sector debt and what this implies for cutbacks to spending.

Second, the results suggest a "protest vote" on a large scale, which implies that the EU leadership can no longer continue to foist policies on the EU citizenry without first checking with them. But the uncontrollable welfare bill and ageing population mean that sooner or later something will have to give: without serious structural reform in this space Europe is doomed to stagnate in perpetuity. This is a recipe for ultimate disaster.

Expect the markets to test Mr Draghi's "pay any price, bear any burden" resolve very soon, at which point markets will correct until and unless euro leaders act fast to introduce the fiscal union necessary to maintain the currency's medium-term viability.

We said last week that Moody's UK sovereign downgrade would have no real impact on sterling. And come the Italian election results it came to pass, as sterling rallied slightly against the euro. This appreciation of sterling against euro will continue during 2013. At least the U.K. can print its own currency – irrespective of the country's rating (did someone forget to point that out to the ratings agencies by the way?).

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Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons Ltd 2012).