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Q&A: Why Italian Election Has Shaken Investors

New elections could bring an anti-euro government into power. Former comedian Beppe Grillo, leader of the third-placed Five Star Movement protest party, has talked about a referendum on euro membership.

Q: What's wrong with Italy?

A: Its economy isn't growing, unemployment is sky-high and its debt burden is rising.

Italy adopted the euro as its currency in 1999 with a lot of debt, which it carried easily for years â¿¿ it just sold new bonds to pay off old ones that came due.

The problem is that Italy's economy has grown very slowly in recent years and has been in recession for 18 months.

Faster growth is needed to shrink Italy's mounting debt burden, which already equals 127 percent of its annual gross domestic product.

The economy is held back by labor rules that favor vested interests such as unions and established workers but kill off job prospects for younger people; high business taxes, and government red tape.

Q: What does Italy's election stalemate mean for Europe?

A: The result is a firm rejection of how Europe's politicians have tackled the debt crisis so far. That strategy, pushed by Germany, has been to offer indebted countries help, provided they agree to tough austerity. Greece, Portugal and Ireland have been bailed out and have had to make deep cuts.

Some say that strategy hasn't been working: the cuts in spending have contributed to high unemployment and recession.

"The politics of the current strategy for coping with the eurozone are looking increasingly fraught and unworkable," said Simon Tilford, chief economist at the Center for Economic Reform in London.

But Italy's elections could have a silver lining, he added. "On a positive note, if it leads to a rethinking of this approach, then it could be positive for the future of the currency union."

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