Italy's political chaos could spell further elections, market uncertainty and economic turmoil, analysts warn.
Italian prime minister Enrico Letta is to go before parliament on Wednesday for a confidence vote after five ministers belonging to Silvio Berlusconi's "People of Liberty" party (PdL) resigned from the cabinet over the weekend. The PdL move has threatened to plunge the fragile coalition government and the euro zone's third-largest economy in chaos.
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The weekend's events won't surprise many as the coalition government – made up of Berlusconi's center-right and Letta's center-left parties – tensions over reforms have meant that it has long been on the verge of collapse ever since its awkward inception in April. In addition, Berlusconi had already threatened to withdraw his ministers if he is expelled from the Senate for a tax fraud conviction he received in August.
However, the stalemate is likely to further delay the spending and economic reforms that Italy desperately need. Unemployment is at 12 percent and the country has a burgeoning debt pile, the second-highest in the euro zone at 130 percent of GDP (the average is 92 percent in the single currency area), according to the Eurostat data agency.
Although Prime Minister Letta told CNBC last week that he hoped Italy would return to economic growth and achieve 1 percent growth in 2014, the latest political upset is likely to knock economic forecasts and rile investors further, market-watchers warned.
"The European foreign exchange market so far isn't getting itself too over-excited [over this] but at an economic level it's going to be a further delay to the kind of reforms to fiscal policy that are needed in Italy," Kit Juckes, global head of Foreign Exchange Strategy at Societe Generale told CNBC on Monday.
"We're on an unsustainable debt path where the debt-to-GDP ratios of Italy and other countries are going up, up, and inextricably up and this kind of politics absolutely guarantees that there won't be the nominal GDP growth rate that gets above the cost of funding the debt that reverses that."