John present a rather dire outlook for Italy, one that is certainly more bearish than our base case. Strong European growth is not only providing band aids for a sick banking system but the patient is slowly on the mend. While a hung parliament doesn't bode well for further European integration, driven by an emboldened Franco / German alliance led by French President, Emmanuel Macron, the anti European sentiments of both Five Star and the Northern League have certainly been watered down. Political inertia is nothing new for Italy and while European growth remain robust, missteps can probably be avoided. However, as John articulates concisely, structural impediments remain.
- In May 2017, it appeared as if everything was coming up roses for the Europeans as Emmanuel Macron was swept into office and reform seemed to be in the air.
- However, the populist discontent rose up in Germany in September and then in Italy this past Sunday and Europe seemed to be facing tough times again.
- Germany now has a coalition government but the Italians seem as if they face a "hung" government, a situation that will take some time to resolve.
In the Spring of 2017, it looked as if Europe had everything going its way.
Eurozone economies were accelerating, US president Donald Trump was talking down the US dollar, and it looked as if the political stars were moving toward a stronger, more unified European Union.
The recent peak of the United States dollar against the Euro was in April 2017, below $1.06, as it appeared more and more likely that Emmanuel Macron was going to win the presidency of France, beating back the populist candidate Marie Le Pen.
The actual victory occurred in early May 2017.
German Chancellor Angela Merkel and President Macron drew together after the election and pledged to work together to make a stronger European Union. Former Italian Prime Minister Matteo Renzi got a boost from these events and it looked as if he might stage a comeback after his embarrassing exit after a reform election failed.
With a possible Renzi recovery connected with the Macron triumph, the picture was of a pulling together of these two quite young political leaders with Germany’s Angela Merkel to bring the three largest economies in the European Union into a unity the boded well for the future of the single-currency community.
The next election on the horizon was to be the German election to be held in late September. Angela Merkel was perceived to be a shoe-in. The Euro strengthened against the US dollar as on September 8 it now cost a little over $1.20 to purchase a Euro.
Whoops! Populist strength in Germany was picking up focusing upon the immigration situation and the position Ms. Merkel had taken toward open borders. Furthermore, populist concern was rising about the strength of Brussels in the running of the European Union, something Ms. Merkel was firmly in favor of.
The Euro weakened as Ms. Merkel’s situation became more evident and the actual election turned out to be the weakest victory she had obtained in her four efforts to be elected for the position of Chancellor for the next four years. Her victory came on September 24, but she was not able to form a government until just this past week.
The strength of the Euro was helped during the following time period by the tax cut passed by the US government in December. The value of the US dollar fell immediately after the bill was passed and by February 1, 2018, it took over $1.25 to purchase one Euro.
Then the reality of the Italian situation came to light. The populist movements in Italy were showing substantial strength in election polls and it became pretty obvious that not only would the major Italian parties lose the election, but that the populist parties might even take home the most votes.
Well, this is just what happened.
The Italian situation is a mess. Estimates are that it will take months for a government to form in Italy…if at all. And, the two leading parties just happen to be the Five Star Movement and the Northern League leading in the polls. No one got a majority and not even the two leading parties combined polled a majority.
The big issues that seemed to dominate this election: attitudes opposed to immigration and a leaning against the European Union.
The future? The results are suggesting that there will be a hung parliament. Italy’s president, Sergio Mattarella will set up the procedures for the forming of the new government and it is expected that negotiations will be protracted and very tense. Government in Italy will, for all intents and purposes, halt.
At the opening of the markets on Monday, March 5, one Euro cost just over $1.23.
Right now, the future for the European Union is not that clear.
Mr. Macron still is pushing ahead toward a stronger European Union and is still promoting a program of political and economic reforms for both France and for the European Union.
Ms. Merkel, in her weakened state, is still trying to give off signals that she will work with Mr. Macron to make the European Union stronger.
But, all hopes for a politically stronger Italy to join this coalition is gone.
The populist backswing, which includes a nationalist leaning, is proving too strong to pull off the legislative actions that are needed to achieve greater political and economic reforms.
It is back to kicking the can back down the road.
I believe that China is seeing how this populist backlash is impacting the ability of nations in Europe, as well as the United States, is causing governments to lose control of their future in the world and in global markets.
As I explained in my recent post about the new events taking place in Chine…see “China: Mr. Xi's New Regime”...this loss of control is being used as justification for extending Mr. Xi’s tenure and to assure that the current regime maintains control in the face of all these disruptions taking place in the world.
Europe is facing a crisis. In the future it can be one of the major, competitive trading areas in the world with one of the world’s strongest currencies. However, it needs to get it act in order.
Resolving the crisis is not going to be achieved by pumping up government spending or cutting taxes here and there. It is not going to be achieved by just substantially reducing immigration. And, it is not going to be achieved by retreating into national cocoons.
I will write more on this in the future because I believe these issues are at the core of what ails “the West.”
The solution, however, is going to have to take into account two factors of history that I believe cannot really be stopped: the spread of information and economic globalization. These two factors must be worked with…they cannot be overcome. And, short run spending and taxing programs are not the answer.
Unfortunately, the situation in Italy presents us with the picture that our short run solutions have not solved the problem. It is time for Europe to really get to work because if the Europeans don’t respond appropriately then the Chinese will have them for lunch.