Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.

The markets are taking in their stride the uncertain outcome from the Italian election and the continuing fiscal impasse in the US.

If held last year, an Italian election with the same uncertain result would have likely seen a sharp adverse market reaction. Not this time. What should we make of this benign market reaction? Is it, as suggested by Ralph Atkins in the Financial Times, an indication that markets are less stressed, or less bewitched by the 'risk on, risk off' herd mentality of the past few years, or dangerously complacent?

After years of being on the brink of a crisis, markets may have become 'crisis fatigued'. But the biggest factor influencing market behaviour to events in Europe this year compared with last year was the announcement by the President of the ECB, Mario Draghi, of the Outright Monetary Transactions (OMT) program. The ECB's commitment to buy the bonds of distressed European countries as part of a bail-out program, if needed, continues to settle markets. 

But Italy's economic problems have not gone away. Its excessive debt load remains and the economy continues to contract.

In the US, 'sequestration dawns, market yawns'. Does the absence of a market response to the automatic spending cuts reflect the inherent strength of the economy, notwithstanding the political gridlock? Warren Buffett thinks so, saying the US is 'a strong country that would overcome what 535 people (in Congress) do.' But the automatic spending cuts, which are phased in over seven months, will slow US growth. The IMF estimates that, if fully implemented, the spending cuts will reduce US growth by about half a percentage point in 2013. And this is from an already tepid forecast of 2% growth.

The US has been described as living in a 'fantasy world'. Projections from the Congressional Budget Office (CBO) assume growth of 4-5% in 2014 and 2015. Stephen King from HSBC asks: 'what happens in a year or two when we see that the growth rate is nothing near to what the CBO is assuming and actually that the underlying arithmetic is not much better than Southern Europe's?'

If markets are meant to discipline policy makers, what happens if markets become crisis fatigued or complacent? Markets are inherently volatile. If they are complacent, it is more than likely that this will be reversed, and the movement will be sharp. The big fear is that policy makers may become similarly fatigued or complacent. Yet as Lorenzo Bini Smaghi warns, 'only on a verge of a cliff do policy makers find the energy to adopt unpopular policies'.

Growth is needed. This will require a sustained effort by governments to implement politically difficult structural reforms, with many of the benefits coming in the medium term. If there is policy complacency and markets do turn sharply, then as Bini Smaghi points out, the immediate response to restore confidence may have to be even tighter fiscal consolidation. But voters don't like austerity programs and then we are back to the 'fiscal consolidation versus growth' debate.

There are no easy answers, but things will be even more difficult if the apparently benign market response to the Italian election and the US sequestration leads to complacency by policy makers.

Photo by Flickr user razzlefrazzle.