The Italian election remains the most interesting story. It seems to me that, in order to understand the situation, one has to understand Mr. Grillo and his Five Star Movement. I have read about some of his policies, which include, according to a statement yesterday, public ownership of water and schools and public health care (as far as I know Italy already has these things…?) and, according to Wonkblog, free internet all, free tablets for children, a 20-hour working week, greater environmental regulation, tax cuts for the middle class, the suspension of interest payments on sovereign debt, and a referendum on the use of the euro. I should probably look into the Five Star Movement in more detail. But the impression from these stated policies is that Mr. Grillo is a left-leaning social democrat with a populist streak who is also fairly stupid.

More broadly, however, the Five Star Movement is anti-austerity and anti-establishment. Mr. Grillo has ruled out a coalition with any of the existing players — he has said he will make no deals at all — and that is consistent with his anti-establishment stance. His anti-austerity stance means that a Senate-minority government could probably not could on his support in the Senate for its economic programme.

What could happen, then? I said yesterday that I could not see that a coalition was an impossibility, especially as it could be in the interest of Mr. Berlusconi. It seems that Mr. Berlusconi said yesterday that a new election would not be “useful” and that he would consider an alliance with Mr. Bersani. Mr. Bersani said that he would not seek such a deal before the new parliament begins sitting on 15th March. One assumes that he would prefer to form an alliance with Mr. Grillo, even though this seems unlikely; such an alliance would allow Mr. Bersani to claim some of the insurgent’s anti-establishment sheen. Another possibility, which is mentioned in the press, is that a new caretaker government could be installed (like the one that existed last year until Mr. Berlusconi forced an election) with instructions to write a new election law. Another election could then be held. A further possibility, which I have not seen mentioned anywhere but seems obvious to me, would be for Messrs. Bersani and Monti to form a Senate-minority government and count on Mr. Berlusconi’s fear of further Grillo gains if another election were held to keep him in line, or on lawmakers or parties from Mr. Berlusconi’s coalition to ignore Mr. Berlusconi and support the government on an ad-hoc basis on account of the same fear. Disciplined informal co-operation might be the best option for Mr. Berlusconi, as it would give him a veto over government policy, something he could use as leverage to keep himself out of jail; on the other hand, he might prefer a formal coalition so that he did not have a veto, and thus could minimise the political cost of unpopular measures, and because a formal coalition might make it easier for him to maintain discipline in his coalition.

Overall, then, I think that there are places for Italy to go, and the incentives of politicians do seem to point towards a deal being done.

Other things to mention: Italy is not Greece — what is needed is not a government that is fully compliant with EU demands, but a government that will be able to negotiate with the EU over the austerity needed under the fiscal compact. And Peter Spiegel, in the FT, worries that Italy may not have the ability to make the kind of credible policy decisions at present that would be required for OMT to come into effect — but I think that, as the experience of last year shows, in an emergency a way would be found to install a functioning government, and the markets know that.