While the United States economy is nothing to write home about, Europe remains a basket case. The next financial crisis is more likely to emerge from Europe than any other region of the world — even before China falls apart.
China is an authoritarian state that can paper over its internal contradictions for a while (though not forever), but Europe doesn’t have that luxury. Instead, it has to obtain the agreement of 28 member states, often an impossible task.
Matteo Renzi, Italy’s primer minister is betting that a Dec. 4 referendum on political reform will give him the backing needed to push through his economic agenda. Photographer: Alessia Pierdomenico/Bloomberg.
The latest example of this, one with ominous implications for Brexit, was the ability of a small region in Belgium to delay the pending trade deal with Canada known as CETA. Wallonia, a region with 3.5 million of Europe’s 500 million people, came very close to blocking the trade deal because of concerns over the creation of independent arbitration tribunals that would allow investors to sue governments for breaches of the treaty.
At the last second, Wallonia was pulled back into the fold but its resistance to the deal illustrated the precariousness of the European project.
Europe is facing other threats, including another Greek bailout and a potential Portuguese bailout if that country’s economy does not turn around. But the most significant immediate threat comes on December 4 when Italy votes on constitutional reform. This vote has been drowned out by the American presidential circus but poses a significant systemic threat. Italy is voting on a bill to amend its constitution. If the bill, which is supported by Italian Prime Minister Metteo Renzi, fails, it could lead to anti-EU parties taking over the government and eventually to an Italian exit from the European Union.
A break-up of the EU, which may have begun with the Brexit vote, is not priced into markets. Italy is the third largest remaining member of the EU and home to the third largest bond market in the world; the yield on its benchmark ten-year government bond rose from an absurdly low 1.04% in August to a much higher but still ridiculously low 1.585% on October 27.
The complacency regarding the Italy vote is breathtaking but not surprising in view of the short attention spans of investors. But readers are warned.
Italy’s banking system is for all intents and purposes insolvent. Germany opposed an Italian bank bailout, a position that grows increasingly awkward by the day in view of growing problems in its own banking system.
Comments
Post a Comment