It’s unlikely that the destabilizing of the political calculus in Europe resulting from impressive showing of anti-austerity candidates in Italy will end prettily or nicely. However, Europe had already put itself in the position of having only bad choices. So the question is who suffers, and the public in periphery countries are starting to rebel against being broken on the rack while Eurocrats and pampered German and French bankers feel no pain.

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Needless to say, the fact that 57% of Italians who went to the polls Monday have figured out that austerity is not working has been met with condemnation and consternation from Brussels and Germany.

The astonishing part about their hectoring is it reflects a real inability to grasp some basic elements of the equation. First, of course, is that austerity is a failed experiment. Even the IMF, which has favored this formula for decades, has been forced to ‘fess up.

But the other two thirds of the Troika are so politically and emotionally wedded to tightening the fiscal noose on the periphery countries that they’ve simply dismissed the IMF’s analysis as inconvenient.

I suspect the IMF would have gotten a more sympathetic hearing if it blamed the failure of austerity on space aliens rather than fundamental shortcomings.

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But the second is that the Eurozone really does not have much leverage over Italy. On the surface, that isn’t obvious, since Italy has €420 billion in financing scheduled for this year, so a rate spike would be painful and costly. But as Ambrose Evans-Pritchard pointed out in the Telegraph:

Yet Italy is big enough to bring down the eurozone if mishandled. It is also the one Club Med country with enough fundamental strengths to leave EMU and devalue, if it concludes that would be the least painful way to restore 35pc of lost competitiveness against Germany since the launch of the euro.

It has low private debt and €9 trillion of private wealth. Its total debt level is 265pc of GDP, lower than in France, Holland, the UK, the US or Japan.

Its budget is near primary balance, and so is its International Investment Position, in contrast to Spain and Portugal. It could in theory return to the lira without facing a funding crisis, and this may be the only way to avoid a crisis if the ECB withdraws support. Any attempt to force Italy to knuckle down risks backfiring disastrously for EMU creditors.

In other words, Italy could credibly exit. But right now, German and EU politicians are reacting badly to this wrenching change in their assumptions, that they held the cards and could impose their will on elected governments. They were confident that if the Bond Gods demanded sacrifices from the public, they’d be made, and pronto too.

Sadly, I don’t read German, but one of my buddies who does says the reactions in the German media were unhinged.

From what I can infer from the spillover into the English language media, they seem to be doing a combo of the denial and anger phases of the Kubler-Ross give stages of loss model at once. They honestly seem to think that Berlusconi can be hectored into line.

And Grillo is simply derided. Funny how no one acknowledges that he was onto the Parmalat fraud before even analysts picked it up. He’s untested, but he’s not the fool that the Eurocrats are telling themselves that he is. Underestimating your opposition increases the odds of failure of a countermeasure.

Some of the quotes are priceless. The Der Speigel headline sums it up: World From Berlin: Italy’s ‘Childlike Refusal to Acknowledge Reality. This is an extract from the leading conservative paper Die Welt:

Silvio Berlusconi ruined Italy — a founding member of the European Community — and brought it almost as close to bankruptcy as Greece.

One had hoped that he wouldn’t get another chance after a lean but necessary year of reforms under Prime Minister Mario Monti.

He probabably won’t get that chance — but he succeeded in at least getting close to the winning Democratic Party. It is worrying that voters didn’t punish this jester by ignoring him.”

In the campaign he promised the abolition of the IMU real estate tax and even the repayment of the taxes already paid under it.

The failure to punish such nonsense casts a bad light on a country that requires a fundamental political renewal.

If you count the results of the Five Star Movement of the rabid Beppe Grillo, who has been preaching wild hatred of the ‘freeloaders up there,’ then more than half of Italians voted for some form of populist.

This amounts to an almost childlike refusal to acknowledge reality.

Funny, this is Berlusconi’s position, per the Telegraph:

“A deal with Monti is impossible,” said Mr Berlusconi on Tuesday. “His austerity policies have put the country into a dangerous recessionary spiral, with rising debt and unemployment, and the closure of a thousand firms a day.”

So who is more reality based here? But you’d never know that reading the German media. This is from Süddeutsche Zeitung:

Now populism, yelling and lies rule Italy once more. In the Greek election dramas of recent years it was the radicals who profited from the crisis. In Italy it has been the populists.

They’re radical too in their ways: They deny reality, they pass blame for the misery to enemies outside the country, they witter on about the simple solution to all the problems. Italy won’t get a simple solution after this election.

It will get a new election at most. And that wouldn’t be a blessing either.

The Guardian kept track of the official threats on Tuesday. This one ran in Reuters:

“It is important that Italy has a functioning government. Monti’s reform path must be continued,” Michael Grosse-Broemer, parliamentary floor leader of Merkel’s Christian Democrats (CDU), said, in the first German reaction to the election result.

This one as described in the Guardian:

German economy minister Philipp Rösler was putting a brace face on events, saying that he could imagine a better result for the pro-reform parties.

But in a statement, Rösler insisted there was no other way:

There is no alternative to the structural reforms that are already underway and which include consolidating the budget and boosting competitiveness.

Ah, but there are alternatives! As Ambrose-Pritchard noted, Italy could depart the eurozone, and my German-reading colleagues say that there was also discussion of Germany leaving the Eurozone.

The German concern is that they are facing open ended rescues of those profligate Latins (which are in reality rescues of those profligate French and German bankers, somehow that part is never included in the equation).

But the rescues were destined to continue until Germany addressed its chronic trade surpluses. Trade surpluses entail financing your trade partners. The alternative proposed by economists like Yanis Varoufakis is for Germany to invest heavily in the periphery countries, to increase the wealth of their population and enable them to make products that Germans would buy.

It appears the German plan (if there was a plan, I think the Germans have been driven by their desire to avoid embarrassing questions about banks and their emotional attachment to manufacturing dominance and the virtues of saving) was to impose a German diktat on the periphery, which would make their governing apparatus irrelevant (that is pretty much the state of play in Greece) and enable them to acquire assets on the cheap.

The problem is, if Greece is the model, is that you destroy so much of the economy that there is not much left worth salvaging. You not only destroy your cheap takeover opportunity, you also destroy your trade partner. Whoops!

The German foreign minister also banged the same empty drum. Again, from the Guardian:

Germany’s foreign minister, Guido Westerwelle, has now weighed in, becoming the third German politician to argue that Italy must stick with Monti’s reform plan.

Speaking in Berlin, Westerwelle said it was important that a stable Italian government is formed quickly – one that is committed to Monti’s policies.

The European Commission was on the surface more reasonable, saying it heard the message of Italian concerns. But it effectively insisted that the beating must continue until morale improves, that Italy needed to reduce its “unsustainable” level of debt and finger-wagged at the dangers of populism.

Notice how democratic processes are dismissed as mere “populism”? As if the Italian public does not have a right to self-determination? And notice also the refusal of the technocrats to take any responsibility.

There’s not an inkling of “Hey, the results in Italy are so bad, maybe we need to do a bit of course correction.” No, all you read is bullying, dismissal, or faux sympathy combined with thinly-veiled threats.

In fact, the Italian revolt has exposed a grave miscalculation by the Eurocrats, that they would do the bare minimum, only driven by crisis (and those crises were mainly foreseeable, like major bond refinancing dates for wobbly countries).

The Greek referendum threat was abruptly shut down, with the help of the betrayal by finance minister Evangelos Venizelos. There’s been a widespread belief that the ECB’s OMT, which calmed the markets last fall, had pretty much solved the Eurozone crisis because periphery bond yields fell and have stayed tolerably low.

In fact, this was an astonishing feat of three card Monti. The OMT in fact was a bluster, a mere clever restatement of existing powers and programs. But it has worked longer than Hank Paulson’s July 2008 bazooka did.

But the complacency of the seeming success of the OMT meant the Eurocrats simply failed to move forward with other needed elements of integration. And that in turn reflects fundamental German ambivalence. Germans would also lose critical elements of democratic and economic sovereignity if the European project moves forward, no matter how much they do to cut the pie in their favor.

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Now of course, the nay sayers are narrowly correct. Italy will suffer if it bucks the will of its aspiring Eurocrat masters. But it faces pain, certain pain, if it stays with its present path. And there are intangible but important positives to the defiance of the policy elites: outcomes will be uncertain, which if nothing else is more exciting, and some people may come out better off short term.

If Italy does ditch the euro, the prospect is for a good deal of short term dislocation, but it could wind up markedly better off longer term. And perhaps most important is self determination and altruistic punishment. People place considerable value on control; the most stressful jobs are ones where workers face both time pressure and little autonomy.

And members of social species are willing to inflict punishment to fellows who break the rules, even when it comes at personal cost and appears to yield no personal benefit.

Italian voters have said “Basta” to self-serving politicians and technocrats. These feckless leaders are living examples of Upton Sinclair’s dictum: “It is difficult to get a man to understand something when his living depends on not understanding it.” So expect the two sides to keep talking past each other as this struggle over Italy’s and possibly the Eurozone’s future escalates.