Europe Is Burning Will the Fire Reach You?

Europe Is Burning Will the Fire Reach You?

In October last year, I decided to leave Australia for Europe. Australia may be the sunburnt country. But Europe is downright burning.

And over the next year, the reckoning will fall due.

I want to be there when it happens.

The question for Australians is whether we can safely ignore Europe’s woes once more. 2008 and 2012 didn’t have a big impact on our economy. Just the stock market.

Our currency usually does most of the heavy lifting when a global financial crisis strikes. It protects us from a recession by tumbling. Just as the pound protected Britain after the Brexit referendum.

In fact, it’s the inability of countries inside the Eurozone to use the same safety valve that’s making the euro so unpopular and destructive. They can’t devalue when they get into trouble.

Let’s look into some of what’s going wrong in Europe. And then how it could reach you.

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The EU predicts a Brexit bonanza (for Britain)

The latest news on Brexit might be the most important yet. The UK Telegraph claims to have seen a slide presentation given to EU officials. The EU claims it might have been stolen by British spies!

The presentation says that a soft Brexit would rob the EU of 8–9% of GDP over the next 15 years. Why? Because Britain would become an economic powerhouse that undercuts Europe and gains a competitive advantage!

In other words, the EU is terrified Brexit will be a roaring success. It even expects just that.

Meanwhile, Remain campaigners in Britain have been fighting for a second referendum on the basis that Brexit will be too destructive to the economy.

The EU just pulled that rug out from underneath them.

The slides expose the EU’s true nature. It retards economic growth. It is anti-trade. And Brexit negotiations are motivated by holding Britain back, not by mutual gain.

The real threat to Europe is that others might realise this. And vote to leave.

They’re not far off.

Euroscepticism goes mainstream

Widespread and coordinated riots in Sweden have pushed the Eurosceptic party there ahead in polls according to Bloomberg. The election is in early September.

In Spain, the new left-wing government is trying to buck the anti-immigration trend. It’s accepting more refugees and migrants than before. But local governments are complaining about the burden this puts on them.

Within hours of the Genoa bridge collapse, Italian Deputy Prime Minister Matteo Salvini was already blaming Brussels. The way he sees it, the EU budget constraints are stopping Italy from spending what it needs to on infrastructure.

The EU argued that it provides plenty of funding for infrastructure. But conveniently ignored that the funding comes from Italian taxpayers. And ignored how that money has been spent.

In 2016, I travelled around Eastern Europe and discovered an awful lot of new blue footbridges over highways. Small signs informed me they were funded by the EU.

The real worry for Europe is that all this Euroscepticism comes at a time when Europe is supposed to be further integrating. Traditionally, each time a crisis strikes, the European project makes headway.

Economists understand the shortcomings of the Eurozone fairly well. They argue added integration is the only way to overcome those problems. But more integration is politically unpopular. And so the formula is that each time there’s a crisis, the next level of integration is added.

Italian economist Ilaria Bifarini told the British newspaper Express about the stark choice:

The EU can either go towards more integration, more risk sharing, and also towards more cohesion of economic policies and not only those monetary, or there can’t be anything other than an implosion of the euro system — which is proving to be no longer sustainable.

So the options are two. More integration or a breakup.

What answer do you think the European electorate will give this time?

National elections suggest it’ll be a big fat ‘No’.

In May next year, the EU Parliamentary elections take place. If voters see them as an opportunity to stop the EU in its tracks, things will get interesting.

According to Bloomberg, Eurosceptics are on course to become a voting power bloc. The trouble is, they’re scattered among the various groups and parties in the European Parliament. The real question is whether they are willing to leave their old parties and unite under Eurosceptic banners.

If they do, the European electoral tug-of-war will be along a new axis. Pro- and anti-EU instead of conservative and liberal or left and right.

The Trump campaign’s chief strategist Steve Bannon has announced his intention to coordinate the Eurosceptics’ efforts in the lead up to the election. It’s on!

Turkey goes viral

Could Turkey be the financial crisis trigger that Europe has been waiting for?

Sort of.

Shae Russell and Jim Rickards warned you about what was coming Turkey’s way for months. In the last two weeks, the lira’s steady downward trend has accelerated into a plunge.

A huge chunk of Turkey’s debts are denominated in foreign currency, amounting to almost 70% of its GDP. That’s a lot harder to repay when your currency crashes.

The Turkish financial crisis is already spreading to other markets. Europe’s banks are Turkey’s biggest lenders. They hold US$180 billion in Turkish assets of various kinds. And their stock is falling alongside the lira.

Italian bonds also fell as the Turkish crisis escalated, pushing yields to their highest level above German bonds since the Italians formed their wacky government.

On Monday, the Italian government contacted the European Central Bank (ECB) about the problem. But the Italian Deputy Prime Minister argued the country wouldn’t be affected by Turkey.

His party’s head of the budget committee said otherwise. Claudio Borghi argued that the ECB will have to act on Turkey to stop contagion spreading. And that ‘ either the ECB will provide a guarantee or the Euro will be dismantled’ because ‘ there is no third option.

But in the end, the real threat from the Turkish financial crisis isn’t Turkey itself. The problem is what it’s telling us.

The global interest rate cycle has barely turned up. The Federal Reserve and the Bank of England have only just begun to increase interest rates. The ECB is only discussing the prospect for next year.

If countries are already struggling with the prospect of higher debt costs, there could be plenty more failures coming. And Italy tops that list.

How Europe’s crisis could find you

There are plenty of links between Europe and Australia.

Australia’s banks get a chunk of their funding from Europe. The EU is our second biggest trading partner, and a major trading partner of China. And our super funds hold plenty of European assets.

So Australians have a lot at stake in Europe.

But it is Europe’s internal stakes that are spiralling out of control. There is now a very real prospect of the euro project failing and for a major sovereign debt default to take place — the biggest default in history if it is Italy that makes its move.

We’d be talking about the biggest financial crisis in history.

Good luck avoiding the fallout.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia