Monday, December 12, 2016

Will Italy kill the European Union?

The only real impact of Italy's referendum was the resignation of Italy's Prime Minister -- The Democratic party was the ONLY pro-European party left in parliament and with the departure of Renzi, it too may decide that Europe is not worth the trouble.

Europe could easily live without Greece, the Greek rescue plan really was the European banks and insurance company rescue plan, over the past 60 months, virtually all the debt that was owned to European banks, pension funds and insurance companies have been repaid at par with new loans from the European Central Bank -- quietly, the Europeans have nationalize a private debt burden at par, considering the health of Europe's bank this was the least the could do.

Italy is another problem entirely, nearly 12% of Europe's GDP, the second largest bond market it is a large economy that sits at the heart of Europe.

The Prime Minister's resignation means that elections will soon follow, and the topic of "interference in Italy's domestic affaires" is certain to be a topic during such elections, while the country tries to save its crumbling banking system.  Therefore the result of Italy's referendum pauses a grave threat to Europe survival as a political and economic entity;  The only solutions for Europe/Italy are the following 5 points (directly from the FT'sWolfgang Münchau)

He lists five ways the Eurozone can stay intact. However, none of them stands up to close scrutiny.

  1. Italy and Germany could converge. To do this, Italy would need to undertake economic reforms to clean up the justice system and the public administration, cut taxes and invest in productivity-increasing technologies. Germany would need to run a higher fiscal deficit.
  2. The northern European states accept large fiscal transfers to the south.
  3. The EU creates a federal political authority with powers to raise taxes in order to transfer income from high to low-income earners.
  4. The ECB finds a way to bankroll Italian public and private debt indefinitely.
  5. Italy’s government will forever continue to support euro membership.

Only one of those five conditions may be sufficient for Italy to remain a member of the euro. The problem is that each one is extremely improbable. And I cannot think of a sixth one,” says Münchau.

Mike Shedolck (He thought that Trump was going to win for months -- he was right and his comments are usually very good) said the following about "Point 5" [...] the consensus opinion is that Italy will not leave the Eurozone because the deck is stacked against that event.

The Italy won’t leave rationale looks like this:

  1. The Five Star Movement (M5S) would have to get into power, but the new technocrat government’s first mission is to rig the rules so that does not happen.
  2. Even if M5S wins the lower parliament, it still may not control the senate.
  3. Even if M5S takes complete control of parliament, it would have to change the constitution.
  4. Changing the constitution without a super majority would require a vote.
  5. The problem with the above thesis is there is only one party that wants to keep the Euro and coalitions will form if for no other reason than people are fed up.
According to Münchau:

"The next Italian prime minister will need to explain to the next German chancellor, presumably Angela Merkel, that her choice will not be between a political union or no political union, but between a political union or Italy’s withdrawal from the euro."
I am relatively certain that Germany is not ready for such a loss of power -- however, stranger things have happened in the past, the implication would be to make Europe's national parliaments subordinate the Brussel's will!  I find that hard to believe that ALL of Europe's members would agree to such a situation (something similar to what happened to Greece BTW)

As Shedlock once said:

"Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the “bail out” debt foisted on their country to be null and void. That person will be elected."

I've been told off a number of times for being too gloomy on Europe, Shedlock's last statement was written in 2011 -- he's still not right, but more an more of the problems surrounding the survival of the EU are becoming too large to simply ignore -- the death of Italy's banking system is a perfect example of this situation.  The solution require the approval of 27 National governments -- in some case (such as Canada's trade treaty with Europe) a small contingent within a nation can derail the agreement for completely unrelated reasons -- there are 27 countries here, each with their electorate, their politicians and their objectives.  Compare to this, hearding a 100 cats would be easy

Anyway, this is the last commentary until after the Christmas break -- so to all a Merry Christmas and a Happy New Year.


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