– Eurozone threatened by trade wars, Italy and major political and economic instability

– Trade war holds a clear and present danger to stability and economic prospects

– Italy represents major source of potential disruption for the currency union

– Financial markets fail to reflect the “eurozone time-bomb” in Italy

– Financial volatility concerns in Brussels & warning of ‘sharp correction’ on horizon

– Euro and global currency debasement and bank bail-in risks

Editor: Mark O’Byrne

Source: Wikimedia

Donald Trump believes trade wars are easy to win.  Winning depends on who your opponent is. At the moment Trump’s target is seemingly China but it is becoming increasingly clear that the Eurozone (and wider EU) is very much also at the top of his protectionist agenda.

This is a problem for the single market. It is not in a strong position when it comes to facing off the strong arm tactics of the President of the United States. Germany is the powerhouse of the EU when it comes to successful trade and industry, but its exporting machine is also vulnerable to US trade tariffs.

The Eurozone (and EU) are facing some major political and financial threats. This was already the case without Trump’s nationalist agenda, but trade tariffs combined with Italy’s political instability and increased market volatility risk now have the single market facing a precarious future.

Italy is a serious political and financial threat

As outlined in the introduction, Trump’s trade wars have brought a number of problems to the fore for the Eurozone but it is Italy that is the most foreseeable threat to economic instability at this moment.

The election in early March and its uncertain result spooked markets somewhat but not enough to offer a real reflection of the risks posed. The result (which is still to be decided, overall) will pose major difficulties for the Eurozone that requires an Italian government focused on economic reforms and fiscal austerity.

Neither party brokering a deal to enter the leadership will be offering this on a silver platter.

Not only are the Five Star Movement and League yet another threat to the ‘one vision’ federal aims of the Eurozone elites but they have also shown very little interest in fiscal restraint. This is the only pathway for the Italian economy to returning to a sustainable footing according to the ECB.

This coming Autumn the (new) government (if appointed) will pass a new budget. Whilst this is pivotal for any new government, it will be more important to watch the politics surrounding the budget.

Considering over 60% of the parliament is made up of populist politicians the chances of an austerity budget being passed are beyond slim.

The two leading parties likely to form a government, The Five Star Movement and League, have made promises they cannot afford to break but are in direct contradiction with EU demands.

Five Star has promised a universal basic income, League has been elected on the promise of a flat income tax. Further inconsistencies with EU reforms are both parties’ promises to reverse pension changes.

At the moment markets do not seem too upset by the political situation in Italy. This is both short-sighted and naive.

Spending policies of both parties challenge EU rules. Whilst Mario Draghi in the ECB has previously been able to keep the country in line, this was with the help of Europhile Mario Monti. Monti is no more and Italians have shown their eagerness to elect more radical politicians who are reacting to the backlash of two punishing decades in which young people were out of work and the elderly lost their savings.

This backlash is something which is being felt throughout Europe. Astonishingly markets and commentators believed Eurosceptisim was on the back burner (despite various election results in 2017).

Italy’s own political outcome should serve as a much needed wakeup call that the euroscepticism within the bloc remain and will likely be reawakened.  It may even bring back the existential threat to eurozone stability so many had long thought diminished. In turn, this will reduce the support the euro is currently enjoying.

As is becoming increasingly apparent, Italy is quite the dilemma for the Eurozone, they cannot afford to let it fail but equally it is seemingly too big to save.

This is very much the calm before the storm, as another economic crisis no doubt looms on the horizon.

 

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Is the euro-area as strong as they think?

The ‘shock’ of the Italian election outcome has caused dementia within commentary circles regarding eurozone strength. To hear them talk about the eurozone one would think it was the epitome of health prior to the 4th March Italian election.

It was not. For example, not only is Brexit still threatening a major existential crisis on the single market but 2017 brought in the destruction of the French two-tier political system and the total wipeout of the centrist majority in German parliament – two things Europhiles thought they could be sure of.

Instead there are a number of looming issues that will no doubt create further divisions and anti-EU sentiments. This is despite markets remaining optimistic.

By all accounts, the forecasts for eurozone growth are pretty optimistic. The European Commission has recently revised upwards its expectations for growth in 2018 and 2019, having been surprised by the performance in 2017.

However, they also warn of a potential ‘sharp correction in financial markets’ . In a 44-page forecast the EC warned of asset price vulnerability to ‘a reassessment of fundamentals and risks [that] could expose debt overhand in a number of Member States.’

Ratings agency Moody have also put a dampener on any self-congratulatory moves, a recent report finds that high-national debt is a long-term threat to the single currency union’s pros