Brexit exposes deep EU fault lines
Contrary to the predictions of the wise men and women of the economics profession the world did not end on June 23rd when the British called a day to the European federalist project. Today Britain has a new Prime Minister, a pragmatist and a very talented politician, Theresa May, the country’s second female Prime Minister. The stock market has recovered, government bond borrowing rates have tumbled, and the devalued Pound Sterling will most likely give a boost to exports and make the UK an attractive target for investors and tourists.
The British weather has been particularly abysmal this summer, but it feels as if the sun is shining bright and warm while continetal Europe is covered in deep, damp, and cold fog.
Italian banks are at the verge of bankruptcy. A remarkable 17% of bank loans or over £300 Billion are bad, many multiples of the levels of debt held during the peak of the 2008 financial crisis. A perfect storm of zero Italian economic growth, low interest rates and politically connected, often corrupt, lending have combined to create a situation where the Italian financial system is in need of a large rescue.
The Italian government wants to inject state funds to save the banks but the amounts required are huge and such an injection is against EU rules on state aid. The EU, especially Germany, is opposed to a state bailout. It is now required that equity and subordinated bond holders take the first losses, or haircuts as they are commonly known. In Italy this is difficult, as many of the subordinated bonds have been sold to households and individuals, and it would be politically difficult to make them take capital losses for the bad debt problems of the banks.
The embattled French President Francois Hollande is rushing around Europe trying to shore up support for the EU, but with 90% unfavourable ratings at home he is a dead man walking.
Portugal has taken the explicit step of prohibiting eurosceptic parties from taking office on the grounds of national interest. Anibal Cavaco Silva, Portugal’s constitutional president, has refused to appoint a Left-wing coalition government even though it secured an absolute majority in the Portuguese parliament and won a mandate to smash the austerity regime bequeathed by the EU-IMF Troika. He deemed it too risky to let the Left Bloc or the Communists come close to power, insisting that conservatives should soldier on as a minority in order to satisfy Brussels and appease foreign financial markets. Democracy must take second place to the higher imperative of euro rules and membership.
Don’t let me get started about Greece and the structural unemployment levels of 50% among the young in Spain.
It is no surprise that insurgent parties are on the rise in several countries, including the fascist Le Pen movement in France and the anti-EU “Five Star” party in Italy, which was founded by a comedian and the party just won the mayor’s office in Rome.
Things are not looking good economically and politically at south of the English Channel and they are unlikely to get better anytime soon unless the vice-like grip of EU is smashed and countries are allowed to break free to become masters of their own destiny. To add insult to injury the unelected and unaccountable European Commission president, Jean-Claude Juncker, an inept, gaffe-prone, and divisive figure, is staying put.
