The eurozone cannot survive without Italy. The serious problem at the moment is the Eurozone also cannot survive with Italy.
Two of Italy’s three largest parties are anti-Euro. The only party in Italy that does support the euro is ex-prime minister Matteo Renzi’s Democratic Party. And with Renzi gone, there’s a huge risk the party splinters.
Regardless, there are no likely scenarios that can keep things from flying apart according to Wolfgang Münchau. I believe his analysis is solid.
Münchau makes a detailed case why the eurozone is doomed in Italy Poses a Huge Threat to the Euro and Union.
He lists five ways the Eurozone can stay intact. However, none of them stands up to close scrutiny.
- 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.
- The northern European states accept large fiscal transfers to the south.
- The EU creates a federal political authority with powers to raise taxes in order to transfer income from high to low-income earners.
- The ECB finds a way to bankroll Italian public and private debt indefinitely.
- 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.
However, 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:
- 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.
- Even if M5S wins the lower parliament, it still may not control the senate.
- Even if M5S takes complete control of parliament, it would have to change the constitution.
- Changing the constitution without a super majority would require a vote.
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.
Showdown with Germany
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.
Would it even be Merkel’s choice to make? I think not, it would take a German constitutional change. And not only would Germany have to go along, so would every other nation in the Eurozone.
German politicians would not agree, and even if they would, it’s likely Italy would never present the demand, at least as implied above.
Italy will simply hold a referendum. That would be the demand. By then it would likely be too late.
Biggest Default in History
The latter would imply the biggest default in history. The German banking system would be in danger of collapsing, and Europe’s biggest economy would lose all the competitiveness gains so painstakingly accumulated over the past 15 years.
It has been the historic failure of consecutive Italian prime ministers to avoid this necessary confrontation, and to think that staying off the radar screen constitutes a viable strategy.
What about point number 5?
I addressed that long ago, and I am still waiting the inevitable.
Let’s flashback to November 23, 2011, to my statement Eventually, Will Come a Time When ….
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 said “EU treaty”, implied is “EMU treaty” (Eurozone Monetary Treaty).
Mike “Mish” Shedlock
If you study Trichet and back into the 90’s there was every expectation of a crisis and it would be necessary to force integration. These events will be turned to the advantage of the Federalist agenda. Just watch.
Italians also have some of the blame via Amato as one of their Prime Ministers in the 90’s. A weirdo.
The spread of the Roman empire, the formation of Germany under an iron-fisted Prussian king, US federalization by civil war, the growth on USSR by invasion and the ongoing rise of ISIL have all been military ventures.
What long term union of dissimilar cultures has not required war?
I ask this because you propose a successful federalist agenda that overrides the apparent will of huge numbers of citizens in supposedly democratic nations.
Democratic nations about to hand over control of their own militaries to the over arching EU and that have had national identities weakened for 50 years and no border control and 17 having given away currency control too.
17 are already sunk anyway.
A lot is riding on just how certain forces react to Italy’s vote and looming in the background is the possibility it might set in motion a series of events that could break apart the Euro-zone. Nine years after the onset of the financial crisis in 2007, output remains 8% down from its pre-crash level.
As far-fetched as the thought Italy would follow the U.K.’s example and leave the European Union may seem, capital flows suggest that some people aren’t waiting to find out. A great deal of money as been sneaking out the backdoor and going to Germany, more on this and the other ramifications the vote holds below.
http://brucewilds.blogspot.com/2016/12/italy-caught-between-rock-and-hard-spot.html
EU integration will not be forced any more than Hillary Clinton wins the US presidency……LePen wins in France…..the EU is [was] doomed [from the start].
LePen won’t win. Italy doesn’t have the balls to change anything. Just a grinding crushing car crash to force integration expecting it will help stop the pain.
The architects couldn’t care less about the human cost. Not their problem. They are detached and taken care of and all they wanted was one Europe by whatever means.
They are also stupid enough to force an unpleasant Brexit that will damage everyone, just to teach others a lesson to prevent others thinking of going it alone.
Pragmatism isn’t in their vocabulary.
I am not at all hopeful simply by studying the architects, reading their work and seeing the dysfunction. It is all combined with an unpleasant, underhanded, sneakiness controlled by zealots.
It’s too late for Italy whilst France has too much to lose by leaving.
Iceland.
Normally, the US would intervene and force some kind of reconciliation (which is what it possibly did with Tsipras), since a collapse of the European banking system would inevitably lead to the collapse of the US banking system. However, with the establishment not in absolute control in Washington this could take a different turn.
Italy´s demise started with the € in 1999. Since then productivity has fallen and Italians have become poorer. So poor that they have problems servicing their debt. So NPLs are at record high threatening bank solvency, and that si where we are today.
Monte dei Paschi will be the first domino to fall. The bank has € 160 bn in assets of which € 45 bn is NPLs (28%). Deposits total € 130 bn and book equity is € 8.75 bn. Market value of the equity is € 0.6 bn. So the equity analysts have drawn their conclusions. Can somebody help solve this equation? And answer why depositors hold € 130 bn with MdP?
Capital controls next?
There are plenty of Capital controls in place in Italy already.
” but the new technocrat government’s first mission is to rig the rules so that does not happen.”… absolutely unbelieveable. Many people like Lars above assume that central bankers play by the rules. They dont.. they cheat when it gets serious. MontiDePaschi might be going down, but Magic Mario wont let it get out of hand. Secret purchases of CDs will instantly raise enough Tier1 cap to safeguard the system. However, this will all end in a single day.. we will wake up and find our debit cards not working & the banks closed. War will shortly follow.
When it gets serious, they lie. Junker says so.
Forget liberty, dead, buried and they will dance on the grave.
I’m sorry I’m a stuck record but NO WAY will they allow the system to fail.
Crush people, punish those exiting, you name it, they’ll do it.
Use the ECJ to change laws, soon have an army, pass laws to prevent critiscism etc.
It’s existential to these people, they will do whatever is needed even to becoming totalitarian and overriding any semblance of democracy.
The one good thing about French socialists is that they have shown all of Europe how to restore their democracy.. simply stop working. Grab a chair & a cup of Joe and watch what happens when millions of people do this in unison.
Robots and third world labor compete to support their global middle class lifestyles?
Except for personal servants, US lower middle suburbanites have better day-to-day living conditions than John D. Rockefeller. Don’t tell me JDR wouldn’t marvel at a leaky window air conditioner, a bag of Sonix hamburgers and instant eTrade quotes from a ten-year-old Toyota Sienna driving down I95 at 75 miles-per-hour with a broken tail light. He’d think it was heaven until he saw a Lexus RX350 blow by.
Adendum:
I understand people still go hungry, drink ditch water and die of mosquito bites. Fewer every year god willing.
So over extended they will end up back where they started, isolated by an ideal and surrounded by a reality that does not obey.
“I’m sorry I’m a stuck record but NO WAY will they allow the system to fail.”
All systems fail. The Roman Empire and any number of other empires, don’t exist any more.
True. Let me reconsider.
Fail as or when predicted here is probably a better way to put it.
They will empty the quiver first. Lots more arrows and they’re all going into the air before too long.
Actually, the EU reminds me exactly of the Roman empire in the decades before it all fell apart. And yet when empires fall, no one sees it coming, but the core is rotten.
Central banks bend the rules. But if they really begin to corrupt the system then the confidence will be lost and fiat currencies will suffer.
Lower Euro. Europe can feed itself. Germans would sell more added value stuff outside EU.
NIRP not corrupt?
NIRP is “corrupt” but within existing rules. My point is that once central banks start printing more fiat to buy equity in banks to save them, then its time to get out of the fiat ponzi scheme.
Buying govt bonds and some corporate bonds is within the rules, but “corrupt”. If they start buying junk bonds and equity to save banks, then its game over.
Some people think central banks can cancel debt. If they do then they have to book it against their own equity which will become seriously negative. And if central banks start operating with negative equity then all trust/confidence has been destroyed.
By the way, quite a few people have presented “CB´s cancel debt” as the solution to the debt problem. Obviously they have forgotten that CB´s also heve a liability & equity component.
To my view managed low, zero or negative rates cover failed debt. Offer all debt holders 0% at 30yrs rolling and calculate… difference is they channel through high grade ( high grade because of the above)… government, corporate and hence politics… = fully corrupt…but hey, some people vote for it every few years, either they ‘have no choice’, are desperate, ‘believe’ , or are corrupt also.
Euro-scepticm is rising in Ireland.
It will take off once;
Tax harmonisation kicks off.
Ireland becomes a net contributor.
Fillon wins in France and heavily courts Irish based companies (as well as UK based) and increases French competitiveness.
Ireland will be screwed and the conversation will increase in volume with EU frightening them into believing they won’t exist by the end of the century without the EU.
The Irish know how to fight, Anglo community must work to have good to offer in due course if/when decision time.
Geest Wilder approval rating increased since court judgement.
Kind of backfired on the system.
How has Germany taken control of fiscal and social policy for 19 (28) nations? Have they?
Check if all major European Finance Ministers decisions have to be rubber stamped by head of the EuroGroup and head of the Euro Working Group.
Find out for yourself, are they all Germans? How many German of the total.
Is this is a German far-seeing policy?
The Germans may not have enough control yet.
Check the role of German banks in various leading to some of their own problems.
Check why all has to be run past Berlin first.
People in the USA should consider next before making too many arguments about Italy and its position in the Eurozone.
Northern Italy between Milano and Rome is like Northern Europe. It’s industry is productive, high tech and highly specialised. I know this, because as engineer I worked with Italian companies a lot. But as one company director in Saronno (close to Milano) told me once: “I’ll never trade with persons/companies south of Napoli”. They buy, but never sign or pay. I would go bancrupt. Southern Italy is like Northern Africa. No business for me over there. And that’s a burden for the whole italian economy.
Northern Italy is one of the Industrial and economical powerhouses of Nothern Europe. Together with Germany, France, Britain, Scandanavia and the Benelux. But the political, fiscal and social systems are rotten. It’s of course the Maffia from the South and its huge black market, tax hiding practises, the Roman Catholic Church and its influence in daily life and the enormous corrupt politicians and pocket filling. Northern Italy would survive in the Eurosystem, because its products are highly competitive on the world market. From my business contacts I know people of North Italy prefer to stay in the Eurosystem. In fact they would like to split Italy in two parts and this break up could be accelerated when politicians turn their back to Europe.
Napoli, Sicily etc partly suffered by being under foreign powers. It changes society. What can happen to some countries under the EU. Loss of self determination over a long enough period can create profound social (and ethical) change. Tax evasion etc becomes endemic when the tax payer feels they have no stake, control and limited representation.
In some press recently, someone in Northern League suggested return to the Medici Florin for the North out of the Euro.
Southern Italy has offered cheap mobile labour to the North for years.
This highlights the cultural difficulties north- south standing in the way.
Germany/Holland etc and Greece/Sicily will not converge easily but need to for the Euro to prosper.
Germany will also face French-Italian axis without UK support in EU Parliament. Good luck to them with that one. Unpleasant being out voted when you are on the hook for the bills.
History stories and press release don’t give a real touch of the European culture, sorry to say, but you Americans are from another continent and another way of life. What we respect of course. I was born and raised in this continent and from the business I serviced I travelled a lot through this culturally rich continent. Originally the ECC including Britain and Italy did work. Later Spain and Portugal joined and labour migration took place to the North. Money was sent back home and improved local economies. But Italy and in some way Spain kept its specialised industry like in past Venice had monopoly on its glass blowing industry. And we were thriving from each others strength and trade skills. Nowadays the span of control in the EU is gone. Too big, too diverse, too concentrated by a small decadent elite in Brussels. They are no part of the peoples of our continent. They are like aliens for us. Poor Greece is another story, but it will be the new Entrance to Europe. Diversity is working against the EU and Eurozone and a break up is likely to occur. But new oppertunities are rising and might establish new mutual interest in Europe. The Spine to this will be China which is setting up a strong relationship with Greece and other European countries to complete its new Silk Road. Greece and the rest of Europe will profit from it. Better said mutual profit. If you see how Chinese Funds have been investing in German machinery and high tech companies and their affiliates their strategy is glass clear. To glue the European fractures this new Road of Trade is growing. You, Americans after the disasters in the Middle East and elsewhere, can learn something from those smart Chinese. And their way of Nation Building and mutually setting up businesses of interest. As Trump and his (Goldman Sachs) establishment will make America hopefully great, but also more introvert and as indebted as Europa (approaching 20 trillion dollars in March 2017!), Europe as the Old, but Matured Continent will overcome its difficulties. That’s what I learned in decades of travelling. We have to and like the Chinese we did it for many, many centuries and long before the USA was established!
I’m in Europe and travel.
Basing a coming together on fear of the world is a big mistake but that is what the EU is doing.
They want scale to compete with numbers in China and India of the future. Perhaps they are right but using fear isn’t usually a winning strategy.
China so/so. Greece as gateway/shipping but not adding too much to Greek economy as transit/mechanised. Read of difficulty in infrastructure projects handed to Chinese in NE Europe. Purchase into manufacturing I know nothing of as is not my realm. Spain is pretty much trashed, what is left is some agriculture and mainly tourism. The Chinese there are on every corner with ‘1 euro’ shops, investment in some big realty projects and casino which they find difficult due to bureaucratic nightmare ( read up on Edificio España and Wanda), and the press there are hard on the heels of Chinese corruption etc. giving some bad rep. China and European countries have some future, but it is not straightforward either.
The northern italians were “Langobards@ and were always more industrious than the southern Italians
1.Germany faces increased fiscal deficits from more military spending as the US cuts its spending to NATO.Combine this with pressure on Germany to run lower trade surpluses by the US and others make additional fiscal deficits unlikely.
Italy has had over 60 governments since WW2 and has almost 900 individuals. in its legislator.Any changes will be resisted by those in power and will come gradually.
Northern Italy is much more like Germany than Southern Italy.Eventually the entire country will embrace new technologies ,but that will take time which the Eurozone does not have
2.The immigration issue has already created a schism in the Eurozone.
It is unlikely that individual countries will accept more bureaucratic authority in the form of a central taxing authority
3.The ECB has already started to lose credibility .For the ECB to back Italian debt and deficits indefinitely means that they will have to do the same for Spain,Portugal and any of the Eastern European counties.This is a formula for the destruction of the EURO.
4.If Italians perceive that their lives are not improving with the Eurozone,then they will vote to leave.
Italy’s ability to pay back debt is removed by the destruction of italian competitiveness.
Right now Italy is kept on the euro so that the nominal value of Italy’s debts in euro is protected.
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However this is just extending the situation and pretending that money will be paid back.
Debts can NOT be paid back by Italian competitiveness under euro!
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The northern Europe ALL have budget deficits, even germany has a budget deficit and total debts from 60% upwards so there is NO more money possible for Italy.
German situation is also weakened further by 1 million “asylum seekers” lured by german welfare and Sweden has 200,000 “asylum seekers” lured by Swedens welfare and in Germany out of the 1 million “refugees” about 50 have found work and in Sweden the situation is similar so the economic situation is WORSENED by open doors policies and the local populations in both Germany and Sweden are totally disgusted by their political leadership so the motivation to work hard and pay punitive taxes to support ones country is eroding.
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Does somebody think it increases motivation to work a lot and pay 50% of the money in taxes when one sees that the tax money is used to give free life for millions of people who despise the local culture, who think local women are wh*res and who concentrate on getting drunk, smoking, harassing women and beating up locals and the police and pushing women down the metro stairs just for giggles like is done by Afghanistan gangs in Germany?
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In a functioning democracy with a totally free press Angela Merkel would be booed everywhere and blamed for every rape and every murder and every assault on children committed by “asylum seekers”.
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If Angela Merkel would not be a psychopathic narcissist she would have resigned and said how sorry she is for the things she caused with tears in her eyes.
I won’t see it in my lifetime but this economic brouhaha in the EU could easily escalate into an eventual armed conflict among western euro nations. This is exactly how wars start.
It’s exactly what it was set-up to try and avoid ever happening again.
It would be no surprise to see it does become an empire but then suffers separatist elements having to take up arms to regain independence and self determination. Not so much country vs country but country/region vs EU/Brussels.
Give it a few years.
The whole situation seems to be about who will bail out the banks. Taxes on Italians to bail out German banks, or taxes on Germans to bail out Italian banks. Europe needs banks that don’t need to be bailed out. That is the only way a united Europe will work. Endless demands for bank bailouts is making European voters unhappy.
Europe needs a gold standard, and sensible banking practices.
England already left the EU. France is now a failed state. The Spanish economy is a wreck. Italy and Germany both have weak economies and ruling parties that are in a shambles (and heavily anti-EU parties waiting to replace them). Illegal immigration dominates the public debate all over the EU; the voters / taxpayers have been pushed off the agenda.
The doctor hasn’t officially pronounced time of death, but the EU is dead.
” Germans move to Orban’s Hungary to flee immigrants ”
” The Brandts are not the only Germans to find a second home in the very conservative Hungary of Prime Minister Viktor Orban, as they sought cheaper, but also “safer” lives, which they finally admit is a motivating factor. Ottmar Heide, a local real estate agent, does not hesitate: “Eight out of 10 of my German customers are fleeing the mass arrival of migrants in Germany,” he declares.
Heide says his German customers regularly complain about Chancellor Angela Merkel’s refugee policy. “They don’t want to live in fear anymore, surrounded by radical Muslims,” he adds.”
*
” Birgit, a 53-year-old cashier and her husband, Udo, a truck driver, are from Frankfurt. It did not take them long to confide that they too are “sick of a country they can barely recognise anymore”.
“My colleagues and I are afraid when we leave the supermarket late at night, with all the rape stories you hear …” says Birgit, a petite blonde. Her husband, a big man with tattooed arms, asks how much Merkel’s refugee policy “will cost, in terms of attacks and also financially … We’re worried for our children’s future and our pensions.”
Udo’s father, Johann, an 81-year-old former miner, says what he likes about Hungary, compared to Germany: “We’re in a Christian country here: No mosques or kebabs at every corner.” ”
more at link
http://gulfnews.com/opinion/thinkers/germans-move-to-orban-s-hungary-to-flee-immigrants-1.1944663
” Germans move to Orban’s Hungary to flee immigrants ”
” The Brandts are not the only Germans to find a second home in the very conservative Hungary of Prime Minister Viktor Orban, as they sought cheaper, but also “safer” lives, which they finally admit is a motivating factor. Ottmar Heide, a local real estate agent, does not hesitate: “Eight out of 10 of my German customers are fleeing the mass arrival of migrants in Germany,” he declares.
Heide says his German customers regularly complain about Chancellor Angela Merkel’s refugee policy. “They don’t want to live in fear anymore, surrounded by radical Muslims,” he adds.”
*
” Birgit, a 53-year-old cashier and her husband, Udo, a truck driver, are from Frankfurt. It did not take them long to confide that they too are “sick of a country they can barely recognise anymore”.
“My colleagues and I are afraid when we leave the supermarket late at night, with all the rape stories you hear …” says Birgit, a petite blonde. Her husband, a big man with tattooed arms, asks how much Merkel’s refugee policy “will cost, in terms of attacks and also financially … We’re worried for our children’s future and our pensions.”
Udo’s father, Johann, an 81-year-old former miner, says what he likes about Hungary, compared to Germany: “We’re in a Christian country here: No mosques or kebabs at every corner.” ”
more at link
http://gulfnews.com/opinion/thinkers/germans-move-to-orban-s-hungary-to-flee-immigrants-1.1944663
“The German banking system would be in danger of collapsing, and Europe’s biggest economy would lose all the competitiveness gains so painstakingly accumulated over the past 15 years.”
Wonder if those who write this drivel, actually believe any of it? Or if it purely an attempt at fear mongering? An Italian default will, in no way whatsoever, cause Mercedes Benz to “lose it’s competitiveness gains” from the past 15 years vis-a-vis Cadillac or whatever. And the German industrial machines sector, will be even less bothered. Is an Italian default somehow supposed to suddenly allow the Nigerians to catch up quality and efficiency wise?
German industry does have a problem, in that they are very much optimized for bestest-fastest-greatest, with much less concern for affordability in a credit constrained world, than for example their Japanese competition, who had their bubble burst more than 2 decades ago. But Italy in-our-out of Euro has little bearing on the world’s overall capacity for being suckered into ever higher debt. Once the pumping runs into the inevitable wall, there’ll be contraction in Germany as well. But “lose all competitiveness gains…???? Talk about pulling nonsense out of once rear.
If DB is hit enough by Italian bank problems it is caused to go down, German export credit financing takes a big hit.
If Italy leaves the euro the euro might strengthen, weak euro benefits Germany.
If Italy leaves euro Germany has a more competitive neighbour and another relocation zone for German industry.