The Fate of the European Union

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Yet complications remain part of the mix. Berlusconi and the Northern League, a key party in his center-right coalition, want early elections instead of allowing a technocrat to lead the country. So does another center-left party, Italy of Values. Italian politicians are reluctant to be associated with the unpopular austerity measures that could reduce both their power and re-electability. Thus, whether or not the push to get Monte to the top of the transitional government succeeds remains to be seen, but the odds are in his favor: elections could take weeks and the ongoing instability would undoubtedly wreak more havoc with worldwide markets. Havoc that would undoubtedly send bond yields soaring once again.

Despite being a victim of so-called market forces, Berlusconi has no one but himself to blame for his ouster. He’s been elected three times, each time on claims he would reform Italy’s government. Yet Italy’s pension system consumes 40 percent of income tax revenue to care for Europe’s oldest population. The country is hampered by high wage costs coupled with low productivity, bloated government payrolls, a sclerotic bureaucracy, sky-high taxes and a dismal educational system producing one of the lowest levels of college graduates among first world nations. It’s manufacturing base has been usurped by Asians since the 1990s. All of the dysfunction was papered over by the formation of the EU and tsunami of cheap money that kept the system from collapsing.

Until now. Italy’s debt currently stands at 120 percent of GDP, second only to Greece’s unconscionable 162 percent albatross. And despite the lower interest rate on one-year bills, yields on five- and ten-year securities remain dangerously close to seven percent, due to a clash between France and Germany over a permanent EU rescue fund, and the ECB’s statement that its current market intervention is a temporary one. Adding to gloom is a statement by Barclay’s Capitol that Italy’s debt has reached a level that is “clearly unsustainable” and that the “EFSF [European Financial Stability Facility] is not an adequate safety net to insulate countries like Italy from contagion.”

The last bit is hardly surprising. Italy’s current debt of $2.6 trillion is more than that of the EU’s other troubled nations, namely Portugal, Ireland, Greece and Spain combined. Moreover, $272 billion in bond debt matures in 2012, along with another $147 billion in bills. The country’s first bond redemption comes on February 1st, when Italy must pay back $35.4 billion for debt sold 10 years ago.

Thus, Greece and Italy become the latest victims of European cradle-to-grave socialist excess, best expressed by Margaret Thatcher’s immortal bromide that such a system inevitably fails when one runs out of “other people’s money to spend.” As of now the transitional governments in both countries, even under the most optimum circumstances, seem to be nothing more than another attempt to kick the fiscal can–and the seemingly inevitable demise of the European Union–down the road one more time.

For those wondering which financial institutions are exposed to what, Barclays has come up with this handy chart showing European bank exposure to Italian debt. But the chart only tells half the story. While France has the most exposure and the U.S. comes in fifth, former IMF official Desmond Lachman illuminates the perils of international banking. “We may not have much direct exposure to the periphery, but we’ve got exposure to bets in Europe that have exposure to the periphery,” he explains. “And that means we’ve got exposure.” In layman’s terms it comes down to this: French banks have the greatest exposure to Greek debt, American and British banks to French debt–and American banks to British debt.

And who is most exposed to the debt of American banks? Perhaps the Obama administration might want to consider issuing “TARP 2″ t-shirts to every American taxpayer. People on the hook for saving the entire world from the wretched excesses of socialism and the futility of Keynesian economic bailouts deserve something for their trouble.

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  • davarino

    What, no commies want to jump in on this one? You socialists dont want to defend your workers paradise? Surely you can blame America some how. No "down with capitalism" slogans. The capitalist system has to bail out the world? When does the socialist system bail anybody out, rather than sucking the life out of economies like vampires? How much longer do we have to keep experimenting with these stupid ideas hatched more than a century ago and proven over and over again not to work.


    • Herman Caintonette

      Thirty years of data is in, and the evidence is clear: trickle-down economics is a colossal failure.

      • Adam

        60 years of data is in, Liberalism is a gigantic failure and has brought on more world wide misery and dispare. And most people can no longer afford to have their pay trickle up to the government to be wasted on nonsense like the EPA or the Cadilac Welfare Queens that contribute nothing to society.

        There are only two ways someone could be dumb enough to think trickle-down doesn't work; a) Either they are too stupid to think for themselves and are therefore forced to echo morons like Debbie Shultz or b) They are lazy layabouts who have never held a job and seen money trickle down from someone richer than themselves in the form of a paycheck…

        Now take down your tent, take a shower, quit the trolling and get job.

        • Herman Caintonette

          Do the math. When only a few are wealthy and the rest are destitute, the economy tanks.

          • StephenD

            Hermmies Hemroid, the rest are destitute?!? As if there is an either or.

            You outdo yourself every time you post. What a foolish thing to say. We are either Super rich…or destitute.

            Yeah, everyone takes YOU seriously.

      • Western Canadian

        Evidence consisting of multiple posts is in, and HC is an ignorant and thick headed moron.

        • Herman Caintonette

          Nanook is obviously suffering from brain-freeze.

  • Steve Chavez

    NO WORLD ECONOMIC RECOVERY will take place until OIL PRICES ARE $50 OR LESS PER BARREL! A $100 dollar bill doesn't even fill up my thirty gallon gas tank in my van that I need for my job! Everyone at the gas pumps complain but their anger is not at the real cause: BARACK OBAMA AND HIS WAR ON OIL!

    Gas prices were a main cause too of home foreclosures and joblessness! The dilemma is to use all your money to fill up the tank to get to work to pay your bills/mortgage and then not having enough money to cover those bills due to most of the money went to fill up the tank. Every month, you go deeper into a hole but still putting all the money you have into GAS to stay employed but then everything around you comes crashing down!

    OBAMA, AND THE DEMOCRATS, WANT MISERY! Their base are the unemployed who get 99 weeks of unemployment checks AND YOU CAN GUARANTEE THAT BEFORE THE ELECTION, THEY'LL DEMAND TO RAISE IT TO 125 WEEKS TO GAIN THEIR VOTE and the Republicans will be blamed for not extending the benefits and "your children will run out of milk to drink!"


    • Herman Caintonette

      Oil will never be $50/bbl again, unless we suffer a second Great Depression. Most of the cheap oil is gone, and even trashing the environment won't get us there. China and India use an increasing portion of the pie, and your pipe dream only buys us a few more years.

      We have to go green. It is a matter of brute necessity.

      • mrbean

        God you are uninformed. The largest oil deposits in the world by far are in North Dakota, Montana, Alberta, Manitoba, and Saskatchewan. Drill and build the pipeline. Green energy is for the "economically and scientifically illiterate and the ethically fraudulent".

        • Herman Caintonette

          The cost of extracting them is such that at $50/bbl., it is uneconomical to extract them and besides, you couldn't extract it fast enough to make a difference in the consumption curve. We've already reached peak oil, peak food, and peak water, and the only hope for future growth is to harvest alternative sources.

          • UCSPanther

            We'll mine our oil, and environmentalists and leftists like you be damned. It is an economic opportunity and an opportunity to research technological advancement, and it will not be squandered.

            Canada has been breaking its chains of socialism over the past years, and there will be no place for you lefties to hide up here, unlike during the Vietnam War.

          • Western Canadian

            Ah yes, the most sickeningly ignorant moron on the board again offers up his oversized ego and undersized mind, with opinions that are utterly worthless.. They are being extracted fast enough to have the saudis more than a little pissed off, and your blather on peak food, water etc, indicates that you are a left over (and staggering ignorant) accolade of malthus. You really must try hard to remain as ignorant on as many subjects as you are.

          • Herman Caintonette

            An "accolade" of Malthus? When you try to foster the illusion of sentience, have a dictionary handy.

        • ebonystone

          And just in the last few days, Norway has announced major new finds in its off-shore fields.
          And in the U.S. there is great potential in the eastern Gulf of Mexico and in the Alaskan Arctic. Of course, the Obama administration won't allow any exploration, probably at the bidding of the Saudis.

      • UCSPanther

        I've got some bad news for you, lefty: Canada is shedding the last of its socialist chains, and you will find that it is not the same country that the hippies hid in during the '60s when they were dodging the draft.

        The tar sands are a major economic, scientific and technological opportunity, and we will NOT squander it, regardless of what a huge pack of environmentalist rejects and leftists say.

        • Western Canadian

          Dude, please do not use the dishonest and inaccurate term ‘tar sands’. They are not extracting tar, they are extracting oil. Tar is not produced from oil.

      • fiddler

        I just heard that Lithium Ion batteries use in Volt cars get a whopping 40 miles per charge and can explode and burst into flames. Add to that disposal of the chemicals they contain is an ecological nightmare.

        It's the law unintended consequences.

        Aw well, "The road to Hell is paved with good intentions!!!"

  • Herman Caintonette

    You either have to go all in, or not at all. Our Articles of Confederation failed, too. United Europe was a long-shot at best; while one currency would have solved a lot of their local economic problems — remember when you were constantly exchanging francs for marks for lira for pounds, and the French had pay toilets? — the longer-term problems were too difficult to solve.

  • mrbean

    The EU was based on plans was to make Europe similar to the the USSR in as many areas and possible. People who were supposed to take care of it were Western socialists and communists, who became the main force in the European structures. They started the huge reconstruction process of the aims of the upcoming European Union. Economical unification started by the conservatives was supposed to give economical boost to all the states involved in it (and did its job well) and spread free market idea. Socialists' and communists' plans were different – they wanted to implement some Soviet patterns in the uniting Europe, such as, for example, central planning in various areas. Above all though they wanted to create one big European superstate. Imagine all the wasted American wealth and lives .

  • Steve

    Nice essay…for a daily blow by blow analysis of the ECU problems and prospects google Mish Shedlock to get to the Mish website.

  • citizen65

    The longer term plans being Socialism. Hope that doesn't come here. Oops, to late.

    • Herman Caintonette

      Most of you don't even know what socialism is.

  • WilliamJamesWard

    Isn't it time for the Europeans to be killing themselves off again. Land, money,
    power, all the things they fought over are still there and there is never a paucity
    of rotten characters to lead the way to madness and mayhem via socialist

  • Peter Buch

    Germany, France and United Kingdom all have a greater GDP than Italy, so Italy is the fourth greatest economy in the EU, not the third.

  • Anti-muslim

    The EU is a big disaster exactly like it's mirror image the USSR! Luckily there are strong anti-EU parties rising in Europe! The people of Europe (like myself) have enough of this garbage! Europe has to be something like an Unity of NATIONAL STATES and not one state! As it looks the EU is finally coming to it's end. With the end of the EU there should also be an end to the islamisation of Europe!

  • Steve

    Thanks for posting this one! Always enjoy visiting your site!!

    Common Cents

  • myohmy

    Screw the E U. The liberal bastards are just paying the price of their stupid mistakes.

  • NotaBene

    The EU will not fail because the EU is not the Euro. The Euro-zone may indeed shrink, but the advantages of an integrated system far outweigh the benefits of disintegration.

    • Herman Caintonette

      We're close to financial Armageddon. If the Euro goes, the EU will not be far behind.

      "EU commissioner Olli Rehn slashed growth forecasts from 1.6pc to 0.5pc next year, warning "that recovery has now come to a standstill and there's the risk of a new recession unless determined action is taken". This did not stop Brussels sending a letter to Italy calling for yet more fiscal cuts to meet it is balanced budget target by 2013.

      "It is imposing pain for pain's sake, and it is going to cause creditors to collect even less on their Club Med debts than if austerity were abandoned. Even in the early 1930s they weren't as bad as this," said Charles Dumas from Lombard Street Research.

      Humayun Shahryar from the hedge fund Auvest said the eurozone faces a "major economic collapse", perhaps with double-dgit falls in GDP. "European banks are massively over-leveraged and almost every one is worthless if you mark to market. This is going to be worse than 2008 because they have run out of bullets. The sovereign states are not strong enough to stand behind the banks," he said." …

      "The credit spigot has been turned off in the US," said Chris Whelan from Institutional Risk Analytics. "Almost every bank is still running down its loan book, so we are facing a slow motion credit-crunch."

      Fiscal and monetary stimulus has disguised the underlying sickness in the debt-laden economies of the West over the past two years. This heavy make-up has at last faded away, exposing the awful visage beneath.

      It is a delicate moment. The risk of a synchronised slump in Europe, the US and East Asia is bad enough. What is chilling is to face such a possibility with the monetary pedal already pushed to the floor in the US, UK and Japan."

      • UCSPanther

        Good. Let the EU burn, but you lefties better be ready, because your entitlements will go the way of the dinosaurs…

    • Anti-muslim

      Europe has to form a union of national states at any cost and not one country led by total liberalists! If the EU stays like it is now we will have Eurabia in a couple of years. The Euro is not the EU of course but it will weaken the EU economy and the pro-EU parties which will hopefully lead people to vote for anti-EU parties such as the PVV in Holland or the UKIP in Britain. It is not only about economics. That's the minor problem. I fear for the future of a free Europe which will come to an end under the leftist politics of the EU! We have to close the borders for immigration YESTERDAY!

  • StephenD

    Should we expect all these countries to go back to their own currency? How long before there is a disillusion of the EU and it is cast aside?

  • Herman Caintonette

    Right now, a Colorado company can make gasoline from wood chips, and their break-even is between $70-80/bbl. Solar is competitive now — I get calls from solar companies which want to put an array on my house at their expense, promising a 30% savings on the cost of my electric bill. It is only getting more and more competitive, whereas oil is getting more and more expensive. World consumption is projected to increase by 30% by 2030, and we're just not finding it fast enough to meet the demand. Something has to give.

    Solyndra is a non-sequitur. The nature of a start-up industry is such that a lot of the pioneers fail. Remember Bowmar Industries? They came up with the first practical pocket calculator; they are little more than the answer to a trivia question today. Israel and China subsidize their start-ups; why shouldn't we?

  • Herman Caintonette

    First-generation nuclear reactors are disasters waiting to happen, and we came close to losing both Detroit (not that anyone would notice) and the Corn Belt (here, the whole world would notice). Price-Anderson is a subsidy to the industry, shifting the costs of a meltdown to the people as a whole. Second-generation (thorium-flouride) reactors reportedly reduce the meltdown risk appreciably, but we need to get busy replacing the old dinosaurs.

  • Herman Caintonette

    Quantum physics is not your long suit. Encouraging the conversion of capital gains now will raise revenues in the short term, but decrease them in the long term. And why should the working man subsidize the idle rich?

  • davarino

    unfortunately Quantum physics and economics do not mix, or at least shouldnt. Although Obama has been making money pop up from no where at an alarming rate, kind of like a Quantum particle. Is that what you meant or were you just making small talk?

    How is it that the working man is subsidizing the rich? You act like the money they make is some how yours and they are stealing it by keeping it.

  • Herman Caintonette

    Normal business cycle. We were in recession for the year prior, and recessions tend to result in lower revenue. Post hoc fallacy.

  • Herman Caintonette

    Who bears the burden of maintaining our infrastructure? When an attorney or CPA pays 35% and a hedge-fund manager pays 15%, the latter is being subsidized by the former.

  • Herman Caintonette

    Normal business cycle. Post hoc ergo propter hoc.

  • topeka

    except…. the latter are all Leftists…. because cooking the people's goose is more profitable to the the thief than letting the people keep their golden eggs.

    Liberals are always demanding the rich pay higher taxes: that's why a CPA pays up to 35% and gets few, if any, deductions. He is a wage slave to the hedge fund manager… who knows this… that's why they incorporate overseas, represent the dictators who stole the wealth of their nations, and support higher taxes here on the "rich"