Italy's stunned political parties looked for a way forward on Tuesday after an election that gave none of them a parliamentary majority, posing the threat of prolonged instability and European financial crisis. The results, notably by the dramatic surge of the anti-establishment 5-Star Movement of comic Beppe Grillo, left the centre-left bloc with a majority in the lower house but without the numbers to control the powerful upper chamber, the Senate.
Financial markets fell sharply at the prospect of a stalemate that reawakened memories of the crisis that pushed Italy's borrowing costs toward unsustainably high levels and brought the Euro zone to the brink of collapse in 2011. "The winner is: Ingovernability," ran the headline in Rome newspaper Il Messaggero, reflecting the deadlock the country will have to confront in the next few weeks as sworn enemies are forced to work together to form a government.
Pier Luigi Bersani, head of the centre-left Democratic Party, has the difficult task of trying to agree a "grand coalition" with former prime minister Silvio Berlusconi, the man he blames for ruining Italy, or striking a deal with Grillo, a completely unknown quantity in conventional politics.
The alternative is new elections either immediately or within a few months, although both Berlusconi and Bersani have indicated that they want to avoid a return to the polls if possible.
For his part, Grillo, whose "non-party" movement won the most votes of any single party, has indicated that he believes the next government will last no more than six months.
The election, a massive rejection of the austerity policies applied by Prime Minister Mario Monti with the backing of international leaders from US President Barack Obama to German Chancellor Angela Merkel, caused consternation across Europe.
"This is a jump to nowhere that does not bode well either for Italy or Europe," said Spanish Foreign Minister Jose Manuel Garcia-Margallo.
In a sign of worry at the top over what effect the elections could have on the economy, Monti, whose austerity policies were repudiated by voters who shunned his centrist bloc, met the governor of the central bank, the economy minister and the European affairs minister to discuss the situation on Tuesday.
The former EU commissioner and his team of technocrats, who were brought in to govern when Berlusconi was consumed by crisis and scandal, will stay on until a new administration is formed.
Projections for the Senate by the Italian Centre for Electoral Studies indicated that the centre-left would have 121 seats, against 117 for the centre-right alliance of Berlusconi's PDL and the regionalist Northern League. Grillo would take 54.
That leaves no party with the majority in a chamber which a government must control to pass legislation and opened up the prospect of previously inconceivable partnerships that will test the sometimes fragile internal unity of the main parties.
The Milan bourse was down almost 4 per cent and the premium Italy pays over Germany to borrow on 10-year widened to a yield spread of 338 basis points, the highest since December 10 and more than 80 points above the level seen earlier on Monday.
At an auction of six-month Treasury bills, Italy's borrowing costs jumped by more than two thirds with the yield reaching 1.237 per cent, the highest since October and compared to just 0.730 per cent in a similar sale a month ago.
The euro dropped to an almost seven-week low against the dollar in Asia on fears of a revival of the euro zone crisis. It fell as far as $1.3042, its lowest since January 10.
"What is crucial now is that a stable functioning government can be built as swiftly as possible," said German Foreign Minister Guido Westerwelle. "This is not only in the interests of Italy but in the interests of all Europe."
