December 8, 2016
It is almost certain that there will be another euro crisis in 2017Posted in Irish Independent · 145 comments ·
It is almost certain that there will be another euro crisis in 2017. The last time we had a euro crisis, the focus of attention was Greece; today the vortex is Italy.
Italy is not Greece. Italy is the third-largest economy in the Eurozone. Italy is the second-largest manufacturing nation in the EU after Germany. Italy is the largest debtor in Europe. The third-largest Italian bank is irredeemably bankrupt. Italy has no government and the people who are likely to win the next election want to take Italy out of the euro and replace the euro with their own currency, the lira.
These are the facts.
Our Finance Minister has said there is no problem in the Eurozone. I really don’t know what planet he is living on.
Unfortunately for the EU, if Greece was a tricky issue to deal with, Italy is — in economic terms — a massive Greece.
Unlike Greece when it was going bust, Italy can’t be patronised, isolated and vilified by the likes of Slovakia, Finland and — shamefully — our own Government. Italy is a country of close to 60 million people and unlike the British, who were always semi-detached Europeans, the Italians are founding members of the EU and original signatories of the Treaty of Rome, which is 60 years old in March.
By March, it is likely that Marine Le Pen will be the frontrunner in the French presidential election. Could she win? Of course she could. And if she wins, the euro is toast.
There is already a massive capital flight from Italy. This flight of money will extend to France in the months ahead.
The euro is the problem and if the EU wants to save itself, it may have to abandon the euro. Quite what that looks like is anyone’s guess, but here are the political facts: the two main Italian opposition parties, the people who won on Sunday, want Italy to hold a referendum on leaving the euro. Furthermore, Le Pen has explicitly stated that the day she wins, if she does, she will pull France out of the euro and reinstate the French franc.
Le Pen currently has 40pc of the electorate. All she needs is the same type of momentum that propelled Brexit, Donald Trump, and the vote in Italy, where the government lost — not by a few per cent, but by a whopping 60pc to 40pc.
After Italy, the chances of Ms Le Pen winning in France have increased yet again. We are talking about a political movement that is jumping across borders, across continents. It is nothing short of a democratic insurrection against the establishment and it is happening all over the world. Every time the outsider wins in one country, it emboldens the next outsider in the next country to have a go.
We are not immune. Arguably, Ireland was the canary in the coal mine. This time last year, Fine Gael strategists — and almost everyone else — were confident that the recovering economy would be enough to propel them into government. In the end, Fine Gael lost 25 seats. Similarly, in the UK the Remain side was confident that the British people wouldn’t make a leap in to the dark and vote to leave the EU. The Remain side made Fine Gael-style arguments about how well the economy was doing, how low unemployment was and how “looney” the opposition was; the electorate didn’t buy it.
The same happened with Mr Trump. Hillary Clinton argued that things in America were essentially good and Mr Trump was mad. The electorate backed Mr Trump.
The same thing happened in Italy and the electorate went for the disunited opposition, rather than the so-called sensible, safe-pair-of-hands government.
I think the same will happen in France.
So 2017 will be the year the British leave the EU, the year Italian banks go bust and Italy’s new government is headed for the first time ever by people who want to break up the euro, and it could be the year that Le Pen wins in France.
In term of the crisis in the euro, Italy will be the epicentre, so let’s focus on it. Three weeks ago, I wrote this column from Rome and suggested that a No vote was likely. But let’s gain a bit of altitude and put the problem of Italy and the rest of southern Europe in context.
At its most basic, Italy has the same problem that Greece, Spain, and Portugal have. It’s a familiar story.
People in the south of the Eurozone borrowed to buy goods from the wealthier north, mainly from Germany. This type of prosperity is rented, not earned. The economic growth they anticipated failed to occur. So there was a repayment problem.
The goods the southerners bought were mainly things like cars and nice goodies, so for the banks that lent to the people, there is no collateral to recover.
Writing off a massive loan as a loss will render the bank insolvent, so instead it goes into “extend and pretend” mode. The banks decide not to call in loans and try to extend repayment terms. But as growth evaporates, these loans just get worse with time, not better. And the sense of crisis spreads amongst the people like a virus in a crèche.
That’s what is happening in Italy and indeed throughout Southern Europe.
Eighteen percent of the total loans made by Italian banks are now considered to be non-performing and Italian banks have no extra capital.
Estimates are that Italian banks may need €40bn just to remain solvent.
Now with no government there is no plan as to how to raise the money to plug the hole in the Italian banks’ balance sheets.
It was announced yesterday that Banca Monte dei Paschi di Siena, the world’s oldest bank and the third largest lender in Italy, will be bailed out by the government this weekend.
This is the beginning. In fact, the Italian State may well have fired the gun for capital to leave the country and head to Germany.
Contagion will spread to France and it is against this background that France will host its presidential election.
What odds on President Le Pen now?