THE Italian election sent European stocks plummeting overnight. Former Prime Minister Silvio Berlusconi almost got re-elected, sending all the austerity measures implemented by Mario Moni into doubt.

A shock election result on Monday showed a surge in support for comedian Beppe Grillo’s anti-establishment campaign, as well as surprising support for former Prime Minister Silvio Berlusconi.



It is an indication of just how interconnected global markets are that the outcome of an election in a southern European country on the other side of the world could send shockwaves through to our local market.



European stockmarkets slumped overnight: Milan's FTSE MIB index tumbled 4.89 per cent and London's FTSE 100 index of leading companies fell 1.34 per cent.



Yesterday our own local market dived 1.2 per cent in early trade as a direct knock on from the Italian stalemate.



The reason: the Italian connection

Investors are concerned that the Italian people have voted in large numbers for a political party which is anti-austerity and anti-euro.



They were hoping for the liberal leader Pier Luigi Bersani to win which would allow him to form a coalition government with pro-austerity and current leader Mario Monti.



Instead the Italian people have staged somewhat of a "rebellion" and a push back against austerity.



The rebellion means a huge share of the vote has gone to Mr Berlusconi and Beppe Grillo, the populist comedian.



Although Mr Berlusconi’s party does not have enough to form a majority Government – it has sent the markets into a frenzy because of fear of contagion.



It puts doubts in investors’ minds about the Eurozone’s ability to emerge from its sovereign debt crisis and see through its austerity program in problem countries like Spain, Italy and Greece



The fear is that a divided parliament in Italy would make the implementation of the austerity medicine (cutting public debt and spending) more difficult and would put a spanner in the works of the European recovery project - something that makes markets very nervous.



Italy is Europe’s fourth largest economy and how it performs and who is in power matters.



It also suffers from a raft of economic problems common to other southern European countries, ranging from low growth to an inflexible labour market and high debt to GDP - making strong leadership a must if it is to face up to its debt issues, implement the necessary austerity measures and start to regain its competitiveness.



We should also bear in mind that markets around the world are coming down off recent record highs, driven up as some see it by governments pumping money into the system and over-excited investors inflating prices of late.



So it is not surprising that we see a strong pull back on uncertainty out of Europe.



On the other hand it can be argued we are seeing a return in investor confidence and appetite.



However ongoing doubts over a Euro area recovery, unresolved fiscal cliff issues in the US, questions over growth in Japan and China mean markets will likely remain choppy for some time to come.



Originally published as How Italian voters tanked global markets