Welcome back to the semblance of stability.
After a terrible October, markets have stabilised. Even the Aussie dollar is doing well. Despite a consensus forecast among investment banks of a 20% decline in Sydney and Melbourne house prices.
No worries, mate.
But I remain very much worried. To discover why, see if you can pick what the following news stories have in common…
“A 14th century lesson may be coming for Italy” is a headline in The National. A New Hanseatic League has formed. These are the fiscally responsible nations of Europe. The Netherlands, Ireland, Finland, Denmark, Sweden, Latvia, Lithuania, and Estonia joined to form the new league.
Late entrants Slovakia and the Czech Republic are tagging along on one particular initiative. The demand is simple. Any bailout shenanigans within Europe must be legally declared and fully funded. And it must come with accountability powers and intervention powers for the bailout fund.
The EU is not a charity that gives away northern money to southern spenders… unless they’ve been good.
The proposal released by the New Hanseatic League’s finance ministers is to beef up the European Stability Mechanism (ESM). This is Europe’s version of the International Monetary Fund (IMF). But for now it’s just a bailout fund for European governments. The fiscally responsible nations want to turn the ESM into an overseer. With a big stick instead of just an indefinite supply of carrots.
Several powers would be transferred to the ESM under the proposal. Powers the IMF and the EU Commission currently hold. More importantly, the finance ministers want the ESM to be able to impose losses on sovereign bond holders before it provides a bailout. TV presenters call this a haircut.
The idea behind the initiative is to ringfence bailout decisions from political influence. If the European Commission is making financial assessments and bailout decisions, political influence will play a part in those decisions.
Italy has already declared its intention to stage a democratic raid on the EU in May next year. Populist parties plan to reform the EU instead of allowing the EU to reform them. If bailout powers are up for grabs via elections, the EU apparatus could turn into a gigantic wealth transfer scheme. Which is what the New Hanseatic League is trying to avoid.
But can the populists really take over the EU? In France, there are signs this may not be as bizarre as it sounds. The political party of President Emmanuel Macron is lagging behind the party of nationalist Marine Le Pen when it comes to European elections.
Populists have stormed national elections in 2018. Could their gains be bigger in the European parliamentary elections? You can vote differently at the EU. And the only energised voters will be the eurosceptics.
Britain’s departure is sure to dent the eurosceptic influence. But the real question is whether the populists can unite as a group within the parliament or not. For, now they only have a small influence within each European party, thereby falling by the wayside when the parties make decisions as a group.
The New Hanseatic League initiative is of course primarily directed at one country – Italy.
So far, the Italian government has held its act together. Despite being formed by hard left- and right-wingers. The technocratic prime minister and finance minister eventually toed the populist line. Recent comments, especially from the prime minister, suggest they’re actually buying into the populists’ swing of things.
But now a different problem is playing up from within the two parties in government. Leaders Matteo Salvini and Luigi Di Maio are reportedly slugging it out on social media. Fear of the coalition failing, and an election being called, is growing. And the right wing would likely gain enough seats to become the biggest party.
The trouble is, this comes at the crucial crunch time. The EU has rejected Italy’s budget. Italy has six days to revise it. So far, all the leading politicians have declared their intention not to bother revising anything. As Salvini put it, this is the first budget written in Italy instead of Brussels, so it’s no surprise that Brussels doesn’t like it.
Next on the agenda in the budget battle is the fine and sanctions the EU will impose. There’s quite a list of options. Each of them is hilarious given they only make Italy’s specific problems worse.
A fine of between 0.2% and 0.5% of GDP would make the Italian government’s financial position worse. Withholding EU funds that flow into Italy after the row over the Genoa bridge collapse would leave populist parties with even bigger shares of the vote.
If the European Central Bank plays hardball with the Italian banking system or sovereign bond market, it would force Italy to refinance debt at impossible interest rates. The only question then would be whether Italy leaves the euro before or after a major financial crisis begins.
Which is only a matter of time anyway. Because while the political budget drama was playing out, the Italian economy stopped growing in the third quarter. The Telegraph summarised another indicator which suggests the country is already in recession:
Italy’s PMI fell to 49.3, its worst result in almost five years and down sharply from 52.4 in September. This indicates the economy is into contractionary territory.
According to Citi economist Guillaume Menuet, Italy is “flirting with recession”.
Mr Menuet estimates that this level of PMI is consistent with a 0.2pc fall in GDP, down from flat GDP in the third quarter.
“Slowing external demand for manufacturers and increasing uncertainty on the domestic economic outlook and economic policies are clearly weighing on Italian growth,” he said.
“It clearly makes the government’s budget projections even less attainable.”
Even when they go into recession, the Italians flirt…
Did you figure out what these stories have in common?
The answer is simple. I predicted them.
Since April, Zero Hour Alert readers have been looking out for the crashpoint indicators I laid out. The stories above read like a list of some of those indicators.
An Italian recession.
An attempt to raid the EU parliament.
Divisions inside the Italian government.
The budget and bailout battle with the EU.
These were four of the nine Crashpoint Triggers I delved into. And my new book explains in greater detail precisely how they lead to the biggest financial crisis in history.
Given the name of the book, you don’t win any prizes for guessing what happens next. It’s called, How the Euro Dies.
The question is whether you want to do something about all this before the fallout. Or do you want to understand what happened after it happens?
You’ve had two warnings from me this year. In April and August. Both warnings came in two weeks before the selling began.
I am warning you once more. The biggest crisis in history is coming. Do something about it.
Until next time,
Nick Hubble
Capital & Conflict
Category: The End of Europe