Host Ric Young talks with Matthew Melchiorre, The Warren Brookes Journalism fellow at the Competitive Enterprise Institute in Washington, DC:

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Matthew, thanks for joining us!

Thanks for having me. Good morning!

First of all, it may not be getting a lot of play in this country, but Italy’s political crisis, as they are calling it, could have a major impact on just what’s happening with the EU crisis, correct?

Yes, that’s very much the case, especially because right now the Five Star Movement, the populist movement that no one has expected to be so popular, has deadlocked the Parliament and Italy as a result cannot form the Government. And as it cannot do that, financial markets are getting more and more intense about how the reforms are going to play out, needed reforms, especially in labour and taxes, and judicial reform, how it is going to play out over the next months, not to mention budget’s consolidation.

And this is the problem because the European Central Bank will not buy sovereign bonds, will not buy the country’s debt unless the country agrees to reform first. This is the precedent that Mario Draghi, the President of the European Central Bank, instituted over the summer. But the problem is that without the Government Italy can’t agree to reforms. So, this is really a defining time for Europe. It is kind of going to be how much turmoil are they willing to accept, for the ECB most likely will intervene thus breaking the precedent it’s set over the summer and kind of opening up a new can of worms.

It is telling in that, I guess they call it the anti-establishment party, the Five Star Movement is headed by a comic Beppe Grillo? I mean does it mean Italians are that fed up with what’s happening in Italy?

Yes, it is an unfortunate rejection of much of Mario Monti’s policies. Mario Monti was the technocrat Prime Minister that had taken office after Silvio Berlusconi left in November 2011 because he hadn’t done anything on reforms and financial markets got fed up, bond yields raised, and what happened was he got kicked out and the president installed the technocratic Government. And the popularity of the Five Star Movement has swelled after Mario Monti’s austerity policies which were tax hikes and liberalization.

And although I do not agree that tax hikes were the way to set Italy up for prosperity in the future, I do agree in his measures for liberalization, although I think they didn’t go far enough. So yes, it is very telling that a movement led by a comedian won, that’s just how fed up the Italians are. I like to say that Beppe Grillo, the leader of the Five Star Movement, his platform is comical but I am afraid he might take that as a compliment as a comedian.

Well, we have elected our own comedians of course, with the Sen. Al Franken from Minnesota, and some say, Ronald Reagan from California. So it depends on who you think is funny. But overall though, with the political numbers as they are, Grillo’s party they have majority at the lower house, but they don’t have the numbers to control the upper house, right? And that’s the issue.

Well, Grillo doesn’t have the numbers to control either houses. So, the Partito Democratico, the centre-left party that actually leads the centre-left coalition, which is a number of parties, they have control over the lower house, and which was expected in this election. The big stunner, the upset was the fact that the centre-left coalition didn’t also take the upper house. The upper house is in disarray because there is no definable majority. No coalition or no single party has got enough votes to maintain control.

And the big disappointment was that Mario Monti decided to run in this election, and he underperformed expectations significantly, and this makes sense. You know, the populist Five Star Movement that was anti-Monti’s policies, the Italians are fed up with austerity, it gained a lot of votes and by nature Monti lost those votes. And so, the upper house is very much in disarray right now and it’s a hung Parliament.

And so the problem is – Italians need to go to the polls again. And they issue with that is that the President needs to dissolve Parliament for that to happen. But this current President Giorgio Napolitano cannot dissolve the Parliament because he is in the last six months off his office. So, first what needs to happen is somehow the two houses of Parliament, mainly the Senate, needs to come together, somehow these diametrically opposed parties need to come together and elect new President, and then that President needs to dissolve Parliament and call for new elections in the next months.

Well, so the issue is of a legislator that really can’t pass anything, can it?

Yes, I mean that is the long-term worry. The short-term worry is the fact that Italy doesn’t have a Government, which is a big problem. And obviously, if you don’t have a Government, then yes, in the long run you cannot carry out reforms. And even if you did pass reform, who is to say that government don’t change it in the next months anyway and then reverse it, which is actually what a lot of these parties campaigned on. That’s what Berlusconi campaigned on, that’s what Grillo complained on, that’s what Bersani, the leader of the centre-left coalition, campaigned on, which is largely reversing the Monti’s policies. Except for Bersani did pledge to follow some of Monti’s austerity, but he has also pledged to reverse other parts of it.

We’ve got about two minutes left. But let’s also talk about the issue of austerity. Obviously Italians don’t want that, we are seeing the same thing in Greece, there are elements in France who are quoted they don’t want austerity measures there. Austerity overall in Europe is apparently the way to go many think, but the tax payers say “no”. Will this also be a major issue for the Italian Government whenever it is formed?

Yes. And I think the problem is that austerity in Europe is largely being carried out the wrong way. So first of all, there hasn’t been a single west-European government that has cut spending, since it began on an austerity program. That’s simply is not true, it hasn’t happened. Most austerity plans have been tax increases. And in fact, the only European countries that engaged in true austerity – tax, cuts and cuts in spending - have been the Baltic countries. And they have underwent one year of significant economic pain but now they are outperforming all the other European countries.

So, I think that austerity has been unpopular in Europe because it has been the wrong kind of austerity. It is austerity for the private sector that is undergoing a recession from a fall in demand, while the public sector continues to get bigger. And until the public sector begins to share that austerity with the private sector and growth resumes, then the wrong kind of austerity will continue to be deeply unpopular in Europe.

Well, although the Five Star Party has a comic as its head, there are really no jokes about this at all.

No, my Italian friends do not find this very funny.

Yes, it is a very serious situation, when you are facing such economic issues and there is no government that can do anything. So, it is going to be interesting in the next few days and few weeks to see how the Italian voters sort this one out. Matthew Melchiorre - Warren T. Brookes Journalism Fellow at the Competitive Enterprise Institute in DC. Thanks for joining us.