Coalition Between Bersani and Berlusconi Seen as Likely

By Roger Baettig | March 01 2013 8:48 AM

The euro held above $1.30 on Friday morning after uncertainty in Italy overshadowed positive data from the Spanish economy.

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Italy's election results this week gave investors reason to believe the country would hinder the EU's progress toward ending the three year financial crisis. Italians, who are sick of the current course of raising taxes and cutting spending, voted erratically for politicians who promised to do away with many of the austerity measures already in place.

Since none of the candidates won a majority in the lower house of parliament, government officials are tasked with forming a coalition or holding another election. The candidates, Silvio Berlusconi, Beppe Grillo and Pier Luigi Bersani started out refusing to work with one another, but many believe they will reach an agreement and avoid another round of elections.

According to Bloomberg, Bersani and Berlusconi are likely to form an alliance as much of the eurozone and outside investors will be pressuring the two to set aside their differences and work together.

The undecided Italian government weighed on the euro and overpowered gains from Spanish data which showed the country's economy could be improving. Manufacturing in Spain decreased at its slowest pace in 20 months, which signaled that the country could be ready to turn a corner.

Markets were also tentative on Friday morning as $85 billion of spending cuts were expected to kick in for the US government. The International Monetary Fund is expected to cut its global growth forecast if US lawmakers do not strike a last minute deal, something most believe to be highly unlikely.