European political crisis unfolding

Eventful months approaching. The outcome of the Hamburg election is nothing short of a disaster for Angela Merkel and her ruling CDU party. Bloomberg reports that "Chancellor Angela Merkel’s party lost control of Hamburg, Germany’s richest state, in the first of seven state votes this year and this threaten to limit her ability to respond to Europe’s debt crisis.

From Bloomberg:

The CDU took less than half its tally at the last Hamburg election three years ago. The results are “painful” for the CDU, Mayor Christoph Ahlhaus said in comments broadcast live, congratulating his Social Democratic opponent Olaf Scholz, a former Labor Minister in Merkel’s first-term government.

“It’s a warning to Merkel,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “If she has to draw any lesson, it probably will be to get tougher at the European level to show something to German voters,” he said. “There is no room for Merkel to come home from Brussels on March 25 with anything that could look or smell like a defeat.”

Irish elections are next this week and the current debate on the renegotiation of the bailout deal is not promising any respite to the current market volatility. Sinn Fein said it would seek a referendum on the euro rescue deal, which would put the entire banker rescue operation codenamed "Dublin" in jeopardy. Party President Gerry Adams said the country could not afford to draw down the 85 billion euro loan.
The following declaration of intent is not going to calm down markets:

“We believe that Ireland may be left with no option, in the absence of a renegotiated deal, but to write down the value of the bonds in the Irish banks or face the prospect of a hugely damaging sovereign default”

• Fine Gael, Irish Opposition Party, February 2, 2011

Italy is on the brink with its Prime Minister indicted for child prostitution and set to stand trial in April.
The Italian Government is wobbling and early election could materialize in springs.
Investors are nervous about Italy. Even before the financial crisis, Italy’s growth rates lagged behind those of its European peers, sunk by pervasive corruption and burdensome bureaucracy at every level of government. It needs a credible government that can ask for tough sacrifices at home, patience from creditors abroad and support from other European governments.
Italy has one of the highest absolute debt levels in the euro zone and meeting its refinancing needs for the next three years would cost in excess of 800 billion euros.

At around 118 percent of gross domestic product, Italy's public debt is the second highest in the euro zone after Greece.