The nannycrats in Brussels better be working on plan B. Plan A, never let a country leave the Eurozone, is set to fail, sooner or later, and in a country big enough to have massive repercussions.
On December 4, Italy holds a referendum that would give sweeping powers to the winner of an election. If the referendum fails, prime minister Matteo Renzi has repeatedly threatened to resign.
On December 5, it is increasingly likely that Europe could wake up to an immediate threat of disintegration.
Financial Times writer Wolfgang Münchau says Italy’s Referendum Holds the Key to the Future of the Euro.
Münchau: After Brexit and Donald Trump, prepare for the return of the eurozone crisis. If Matteo Renzi, Italian prime minister, loses his constitutional referendum on December 4, I would expect a sequence of events that would raise questions of Italy’s participation in the eurozone.
Mish: Questions about Italy’s participation in the eurozone do not go away if the referendum holds. Questions last at least until the next election.
Münchau: The underlying causes of this extremely disturbing possibility have nothing to do with the referendum itself. The most important was Italy’s economic performance since it adopted the euro in 1999. Total factor productivity, the portion of economic output not explained by labour and capital, has fallen in Italy by about 5 per cent since then whereas in Germany and France it went up by about 10 per cent.
Mish: The underlying cause of this mess is the euro itself and the treaty that created it. Productivity is certainly to blame, but the treaty did nothing to alleviate productivity problems, instead it enhanced such issues. A single currency and a single interest rate structure was bound to increase tensions, and it did.
Münchau: The second source was the failure by the EU to construct a proper economic and banking union after the eurozone crisis of 2010-2012 and to impose austerity instead. If you want to know why Angela Merkel cannot be the leader of the free world, look no further. The German chancellor could not even lead Europe when it mattered.
Mish: Merkel has certainly blown it in a number of ways: on Greece, on a banking union, on Russia, on refugees, on punishment of the UK following Brexit. Münchau may not agree with all of those, but he does agree with some of them. Her policy of blowing in the wind on some issues, but remaining steadfast on refugees is directly behind the rise of the eurosceptic, anti-immigration AfD party.
Münchau: Italy has three opposition parties, all of which favour exiting the euro. The largest and most important is the Five Star Movement, a party that defies the usual left-right classification. The second is Forza Italia, Silvio Berlusconi’s party, which has turned rabidly anti-euro after the former prime minister was forced out of office in 2011. And the third is the separatist Lega Nord. In democratic countries, it is common that opposition parties eventually come to power. Expect that to happen in Italy too.
Mish: No disagreement. That is why I stated the coast is not clear even if Renzi pulls a rabbit out of his hat and wins the referendum.
Münchau: The referendum matters as it could accelerate the path towards euro exit. If Mr Renzi loses, he has said he would resign, leading to political chaos. Investors might conclude the game is up. On December 5, Europe could wake up to an immediate threat of disintegration.
Mish: No disagreement.
Münchau: In France, the probability of a presidential election victory by Marine Le Pen is no longer a remote risk. Of all the candidates that have declared, she is the best prepared. There are some who could beat her, like Emmanuel Macron, the former reformist economics minister, who declared his candidacy on Wednesday. But he may not make it to the final round of the elections as he lacks a party apparatus. If Ms Le Pen became president, she has promised to hold a referendum on France’s future in the EU. If that referendum were to lead to Frexit, the EU would be finished the next morning. So would the euro.
Mish: The only candidate Marine le Pen might beat is current president Francois Hollande who has an amazingly low approval rating of just 4%. Polls suggest anyone else would beat her. But we have seen how far off polls can be. I agree with Münchau’s key point: after Frexit, “the EU would be finished the next morning. So would the euro.” There are other match-ups that will cause the EU to lose something, no matter who wins. For details, please see Another One Bites the Dust: Sarkozy Outed in First Round of French Elections.
Münchau: A French or Italian exit from the euro would bring about the biggest default in history. Foreign holders of Italian or French euro-denominated debt would be paid in the equivalents of lira or French francs. Both would devalue. Since banks do not have to hold capital against their holdings of government bonds, the losses would force many continental banks into immediate bankruptcy. Germany would then realise a massive current account surplus also has its downsides. There is a lot of German wealth waiting to be defaulted on.
Mish: I have written about Target2 cascade implications of a large country leaving the eurozone many times. Germany will pay, one way or another. The best solution actually, which Münchau failed to mention, is Germany leaving the Eurozone now.
Münchau: Can this be prevented? In theory it can, but it would require a series of decisions taken in time and in the right sequence. For starters, Ms Merkel would have to accept what she refused in 2012 — a road map towards a full fiscal and political union. The EU would also need to strengthen the European Stability Mechanism, the rescue umbrella, which is not designed to handle countries the size of Italy or France.
Mish: Merkel may not be around. It is by no means certain that she wins the next German election. Then, even if Germany agrees to a transfer union, so would Finland, Austria, etc., etc.
Münchau: Think about it this way: if you ask the German chancellor whether she wants commonly-backed eurozone bonds, she will tell you no. But if she has to choose between eurobonds and an Italian exit from the euro, her response may well be different. The answer will also depend on whether you ask before or after the German elections next autumn.
Mish: I agree that Merkel will lie, then bend if necessary. But it is not her decision alone. The German constitutional court would have a say. So would other Eurozone countries. And, as I said, Merkel may not even be around.
Münchau: My central expectation, however, remains not a collapse of the EU and the euro, but a departure of one or more countries, possibly Italy, but not France. In the light of recent events, my baseline scenario is now firmly on the optimistic scale of reasonable expectations.
Mish: Münchau is indeed on the optimistic side. But note that his baseline scenario now includes several countries leaving the Euro.
Above emphasis in italics was mine in all cases.
Final Thoughts
A piecemeal disintegration of the Eurozone is now obviously very realistic. It was my baseline scenario all along.
For a detailed discussion of why Germany is a guaranteed loser no matter what happens, and why blaming Greece and Spain (Speece) is the wrong thing to do, please see Virtues of Germany vs. the Vices of Greece; What About “Speece” and Gold?
The fundamental flaws of the eurozone, including Target2, all but guaranteed a destructive breakup. See above link for details.
Mike “Mish” Shedlock
Mish, no way. It will not be allowed to happen.
Le Pen won’t win.
Renzi will has his way.
EU truck keeps trucking.
There is no way the EU/Euro will be allowed to end.
Unfortunately, I think you are right.
Mish, take a bit of advice! These euro fanatics have the reins and they will lie, cheat, and do absolutely anything to keep their beloved project on the road.
So then there will be conflict.
Little mention of this in the European msm, unsurprisingly, waiting for the drama of Italy springing a ‘surprise’, shocking…
Same day there is Italys referendum and Austrian presidential election.
Hopefully it will be a double-shock day for the arrogant and democracy hating elites of EU.
Makes no difference. Nothing will stop it, in 2020 it will attend still be there, just a few different faces.
Those parties may be anti Euro by they are not anti EU.
Most of the misery in europe is caused by Euro.
EU is OK if it stays the hell out of immigration policies, taxation policies, welfare policies, free movement policies etc.
EU should be just about free trade and minimal common standards (not the current standardization bureacratic hell) and common environmental standards (again minimum) and some common issues such as if a country in middle-east or africa refuses to take back their own citizens from any EU country (criminals, failed asylum seekers etc.) then all EU trade with that country is stopped and all visa issuance stopped EU-wide for that countrys citizens including the elites.
The EURO is one stop on the destination of the EU to the USE. EU can only keep moving that way, interfering in every area of nationhood. Once it stops or rolls back, it’s dead. They will not allow that. Resistance is futile.
https://s-media-cache-ak0.pinimg.com/236x/14/88/24/148824f6a036291a2b66d4e4d0d69d61.jpg
Oh boy, I hope you are right and that the EU and Euro jaloppy will break apart. But I fear you do not give enough weight to the determination of the Brussels and pro-EU Elites to keep the whole show on the road.
What card are they going to throw down, their ace ‘ you owe us a lot so we will agree to share what you owe us in exchange for a central budget and full transfer of your fiscal autonomy’ ( wink wink we can print) ?
Orchestrate a severe crisis so people beg to stay in. Worked in Sweden 1997.
Also, keeping asking the question until they get the answer they want then never ask again – Ireland, Denmark examples.
Another Project Fear.
Threaten bills from here to eternity.
Think of something and they probably have it on the tools list.
https://www.youtube.com/watch?v=FGK8IC-bGnU
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Looks like project fear does work nowadays. Brexit, Trump.
“does work” should have been “does not work” in the above post
The choice for Italy is:
1. Euro which means:
mass unemployment, youth unemployment around 50% which means less family formation and less kids, being controlled by Germany and ECB and total destruction of several generations of italians and the promise is MAYBE to get things under control in 20 years after gutting services to people and deflation and still having neck-breaking amount of debt in 20 years.
2. Leaving Euro and returning to their own italian lira and letting italian lira be free-floating so markets decide its value which would mean 20%-50% devaluation compared to Euro which would improve competitiveness, bring jobs back, make german exports to Italy too expensive so products would have to made in Italy, because of competitiveness Italian manufacturing would be competitive against german manufacturing on other european countries.
Leaving euro can be done with either saying bye-bye to debts or paying the debts back in italian liras whose value would be controlled by markets and which italian central bank could print to pay back everything and just pay for this in higher inflation compared to not paying debts.
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Italians are idiots if they stay in Euro.
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Euro is a good currency for Germany and Luxemburg, for all others it’s economical death with just the speed of the economical death varying between really quick in Italy and Greece and slower in France, Nethderlands and Finland.
Belgium, Spain etc. being somehwere in between.
It’s meant to work like that.
There is an acceptable form of nationalism exhibited by the likes of Schauble.
It’s covered up but it’s “become Germany or wither”. Germany is what it is due to the virtue of German discipline.
No one mentions the benefit they get from the others as captive customers and them helping weaken the joint currency Germany benefits from.
Withering as a country is OK as it will force unification through crisis which is the ultimate plan.
It’s no use trying to explain this to the people impacted as most cannot or will not recognise it.
Germany should engage in massive fiscal transfer but will not, yet. When the EURO was formed it should have been on the basis of common tax and spend and fiscal transfers. It will have to get there in the end one way or another.
In exchange others will have to give up their nationhood.
This direction obviously formed by a certain concensus amongst those in national power, some wiser than others to its origin. If you had to place a finger on who or what is behind this movement, beyond the stateless, legally exempt, set of agreements, that are irreproachable due to their impersonal nature and non identity but that none the less empower adherents to exercise authority across Europe – who or what would you name as most ultimately responsible?
Apart from previous philosophies pre-ww, Schuman’s proposals and the ECSC seem an obvious start, a year after its signing the objectives were already clear, and hence presumably predefined from the start :
“On 11 August 1952, the United States was the first non-ECSC member to recognise the Community and stated it would now deal with the ECSC on coal and steel matters, establishing its delegation in Brussels. Monnet responded by choosing Washington, D. C. as the site of the ECSC’s first external presence. The headline of the delegation’s first bulletin read “Towards a Federal Government of Europe”” wikipedia
“Leaving euro can be done with either saying bye-bye to debts or paying the debts back in italian liras whose value would be controlled by markets and which italian central bank could print to pay back everything and just pay for this in higher inflation compared to not paying debts.”
Saying bye-bye to debts? Hyperinflation to pay off Italy’s debts?
I’m not pro-Euro at all and think it’s been a disaster for Italy, but the way out is not as easy as you think.
There’s close to no way out. It was made that way and one architect of the lock in was Amato the Italian x-prime minister.
I have read some of his witterings and he comes across as a fanatic. Wanted a system thar slowly captures sovereignty so no one realises and that doesn’t have an easy to identify executive that can be blamed.
Very worrying. When I read some of his stuff I realised every self respecting nation in the EU has a duty to push for massive reform or exit.
Few ordinary citizens know what the plan is. Most probably don’t care and the mass unemployed youth are unable to apportion the blame – on purpose.
The unemployment and crises being used as a tool to force unification/integration. People as pawns. It was known there would be crises and it was discussed how useful such would be to help force the unification.
There is no need for hyperinflation. You are the one hyperventilating about hyperinflation.
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Right now politicians in italy and europewide are worried about deflation.
Countries in Europe should leave Euro and return to their own currencies with floating exchange rates decided by markets.
After doing that one can either say goodbye to euro debts that are currently crushing many countries or pay them with their own currencies since their own central bank can print money to pay the debt.
This would cause higher inflation in the 10% range.
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In euros Greece and Italy will never be able to pay their debts because continuing in euro destroys the economy and compepetiveness.
All italians must realize that the reason your country is drowning in asylum seekers is NOT other european countries which have closed their borders with Italy since 2015 started by France in June 2015 and followed later by Switzerland, Austria and Slovenia (as much as they can without building huge walls) but the person responsible is your prime minister MATTEO RENZI who pushed over 100,000 to the north without registration already in 2014 according to Newsweek (out if 170,000 that received a sea-taxi ride from libyan waters to Italy thanks to EU) and kept pushing even more to the north in 2015.
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This spread the message that “go to Italy, you will be pushed through and get to welfare paying europe and get 1000 euros a month, free apartment for life and family re-unification straight to welfare with just a “story” where you claim you were threatened or persecuted in your homeland and NO proof needed thanks to EU-directives on asylum processing and EASO (European Asylum Support Office) modules and guidelines and training developed in SWEDEN and made EU-wide by EU commission.”
Hundreds of thousands came.
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If Renzi had registered everybody and given them the 0 euros which Italy gives in 2014 and absolutely no way to the northern welfare-europe people would have stopped coming and NOBODY would have come in 2015 and 2016.
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Matteo Renzi is responsible for EVERY crime committed in Italy in 2015 and 2016 by “asylum seekers” of whom 99% came because they heard one can get lots of free money and free apartment in europe and bring their family to welfare with them through family re-unification if one just gets through Italy and Greece to welfare paying europe.
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The EU “solutions” like burden sharing have lured more people to come to Italy because they heard that even if french border police will not let people come into France from Italy anymore then EU will transfer them to welfare paying europe.
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Vote RENZi out!
What you report is effectively Italy is TRYING to take out northern Europe / Germany. What Mish reports is Germany is trying to take out southern Europe. A reasonable conclusion would be each country entering the EU anteed up their national sovereignty in a high stakes poker game for domination of Europe. The UK folded and took minor losses. If Italy or France leaves the EU, the pot may become so small that Germany’s hand is called.
Italy is not trying to take out northern europe.
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Italian prime minister Matteo Renzi is just a leftist who has no concept of what he is/was doing and Renzi wanted just a quick fix because italians got angry that so many people were coming in 2014 (Italy and EU picked and gave rides to Italy for over 170,000 people from near the libyan waters) so Renzi and italian authorities did NOT register over 100,000 and in fact PUSHED them to the north.
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Then Renzi was surprised in 2015 that even more came and Renzi started crying for burden sharing and calling for EU to save him from his own stupidity after France closed their border with Italy in June 2015 and instructed french border police to stop every “asylum seeker” coming through italy at the border and throw them back to italy if they sneaked past.
“… welfare paying europe and get 1000 euros a month, free apartment for life …”
In France, RSA is about 500 euros plus another 150 for a housing subsidy. You have to be a French citizen or resident and registered with the employment office which means looking for work. What you wrote males no sense. No 1000 euros a month, nor free apartment.
Some exageration going on, but not much. Free food, housing and care with protection of rights, possibility of nationality hence passport/travel , schooling. Average wage in Turkey @ 250 eu monthly, in European countries that is simply given as income support. A family can claim over 1000 eu, plus housing. The opportunity is obvious.
If one does not have money for an apartment and can’t find work does France let people live on the streets once they are granted asylum?
Are the millions of unemployed muslims living in France on the streets or does french society give them free apartments in ZUS zones (Zones Urbaines Sensibles) and free money?
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France gives free apartments and free money. although it’s possible other countries give even more free money.
Once asylum is granted based on their fairytale story the asylum seeker is instantly a resident in France and all of western europe and entitled to complete welfare including free apartment and around 1000 euros a month.
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I’m talking about “asylum seekers” once they have been granted “asylum” after telling a fairytale of lies that ticks all the boxes on EASO (European Asylum Support Office) modules so EASO-trained bureaucrat gives asylum based on just a story.
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In Sweden, Germany, Netherlands, Belgium, denmark, Finland and Norway those granted asylum get a free apartment, family re-unification to welfare process started and about 1000 euros a month when single and once their family has joined them on welfare from Iraq, Afganistan, Somalia etc in about 3-6 months (crazy EU family re-unification directive demands QUICK family re-unifications) the family gets about 2500 euros a month.
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This is what is luring people to come to western europe and cry in Italy and Greece how horrible it is in there because Italy and Greece give 0 euros and you can sleep on the street if you dont work or find charity accommodation after getting your asylum and residence permit with it.
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Starting from France it’s WELFARE-EUROPE where everything is free when your asylum is accepted and you are “unable” to find work maybe because people coming can’t read or write (90% of somalis) or maybe because people coming don’t speak any other language than arabic (most of iraqis) or just act crazy (many afganistanis).
The EU project was fatally flawed from the beginning. Same handywork of CIA and others who falsely imagined Iraqi Weapons of Mass Destruction, so should not be so surprising. Makes me appreciate the care that went into the setup of the USA by its founders, including the electoral college which worked so well this time around. Historians will look back on European Union as a short-lived deeply flawed Marxist-Socialist construct. Europe will no doubt be stronger with individual countries than as a larger collectivist society.
‘A French or Italian exit from the euro would bring about the biggest default in history’ I disagree. The biggest default in history will be when President Trump announces that the US government is going to default on its bonds.
Well – That will never happen
Literally
When you control your own central bank and the currency is free floating based on markets there is absolutely no need to default.
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The problem with Euro is that European Central Bank is in Frankfurt and controlled by Germany and all the countries are tied to euro so countries have no option to control their own interests and the markets can’t help out the broke countries by lowering the currency values for them which would make the countries own companies more competitive on the countrys internal market and in export markets.
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In euro the only choice is deflation, more debt in a currency you dont control and 50% unemployment that kills economy and demographics.
“On December 5, it is increasingly likely that Europe could wake up to an immediate threat of disintegration.”
Suits me. On the 6th of December we start the 100th year of independence and nothing would suit me better than see EU collapse that day or coming year.
It won’t happen samijr.
Sorry.
Even the UK may not manage to leave no matter what Theresa May states.
Crises will be engineered to achieve the result.
In the case of the UK I am expecting some currency actions to create a panic.
I don’t know when or how but EU/IMF will be behind some event (s).
Lagarde is a tricky piece of work and the EURO/EU is here #1 concern.
Let’s see what happens but the EU will not be allowed to separate even if UK does leave.
The description is possible, but not the most probable. YES wins: you have a new electoral law that will be “fine tuned” to the moment, the new government will be a coalition where M5S will have its importance; NO wins, a new government will redesign the electoral law, the new elections will deliver the government to a coalition where M5S will have a part. From here to there electors will have the time to observe the capacity of M5S in government (Rome and Torino’s mayors come from M5S). If the two examples will be positive, the global scare will fade, if the two examples will be negative, the vote to M5S will fade. Easier than exiting the Euro is fixing it, somebody might start to understand it.
Euro was fixed from the beginning, that is not hard to understand.
The cost of the fix to Germany will test German commitment to the project.
After picking up the bill for German unification will they do it again for the whole of the Eurozone?
Probably yes but only in exchange for complete budgetary control. Italy and others will disappear as nation states. You needn’t vote again. No point outside of very local politics.
One impact of this will be a malaise. Deep psychological resignation to your fate that suppresses all entrepreneurial spirit as whatever you do will make no difference. It will be expected to liberate the economies. It will achieve the opposite.
A gold standard would have led to more balanced trade. Printing credit led to such absurd debt. Europe had a common currency for centuries, gold, and it worked just fine.
Italy has quite a decent reserve. I don’t know how it’s accounted for but a transfer to ECB in exchange for bail outs might not be impossible?
One way or another Italy will implode, EU exit or not ! Imbalances in Euro/USD Euro/JPY will in turn explode an avalanche of cataclysmic derivative bombs. This should all start taking place just after Trump’s inauguration party.
Tempest in a teapot … don’t you know the way of the EU is to keep sending things back to the voters until they vote correctly? Italy is going nowhere ;=)
Who is the guest who won’t leave?
The EU days are numbered for one reason. There are too many stress points to withstand. If it were just financial they would survive but add discontent for immigration policies and nationalism rising, it will be too much.