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Italian Election Means New Stress For Eurozone

Monti's resignation raises the chance, analysts say, that the ECB will have to actually deploy its bond-purchase weapon. But without a stable government that can credibly agree to the terms of a bailout, Italy can't get help from the ECB bond purchase plan.

Still, markets knew Monti would be leaving soon anyway, with elections already scheduled in April. And if debt costs continue their rise, some think that could be the spur Italian politicians to move forward with pro-growth steps such as reducing legal protections against layoff for established workers. The practice deters hiring and raises youth unemployment. Monti made some changes, but was unable to push through wholesale reform in the face of union resistance.

Raj Badiani at IHS Global Insight said high bond market interest costs could "force the Italian political classes to refocus on the actions needed to push away intensifying" government debt pressures.

That's what happened in late 2011, when rising bond yields intensified fears Italy might default. Pressure from that helped force Berlusconi to resign â¿¿ and make way for Monti.

"The slightly scary thing is, it's easy to see how it can get significantly worse and continue to do so, but it's very hard to see how things could possibly surprise on the upside," said Sony Kapoor, managing director of think tank Re-Define. "So I think the best-case scenario is that the change in the political scene will reflect badly on the economy â¿¿ but not too badly."

But, warns Kapoor, if "Berlusconi does come back and the old discredited guard of Italian politics comes back, things could get significantly worse rather quickly."

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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