As we head into the summer, those of you travelling in Europe in the coming months will likely appreciate the free passage across country borders in the old continent. Enjoy it, for it might be the last time. The largely self-congratulatory message from Brussels is full of glee and merriment, with exuberant jubilations over the recovery of Europe’s economy. And it is true. Europe’s economy, like that of America, is indeed growing. However, upon closer inspection, it becomes clear that festering economic and political risks cast long shadows over Europe’s prospects and pose serious threats to the EU’s cohesion.
While most market commentators and experts are celebrating economic growth, we feel they are missing the elephant in the room. The European Union is coming apart at its seams. This post is a bit of a preview of our Digger Quarterly, where we review the state of affairs in the Eurozone in more detail.
Europe is facing formidable challenges: The immigration issues are creating huge tensions and Eastern Europe has a very different idea of democracy and union than Western Europe (or more precisely, France and Germany). Meanwhile, Merkel is losing ground, while Italy is sliding into more financial and political trouble. Our dear Italians, in our view, may very well turn out to be the Achilles heel of the EU.
Source: Hedgeye, www.hedgeye.com
You can only wonder…
The memory of financial markets is extremely short-lived. At the height of the European financial crisis in 2011, investors kept a clear distance from Italian debt. The yield on ten-year government bonds back then climbed to 7%. Finally, the then Prime Minister, Silvio Berlusconi, was forced to resign by his European “partners”, as the EU feared an uncontrolled increase of debt to EUR 1900 billion.
Today, everything is hunky-dory, at least according to officials and most commentators and mainstream media. And yet, the mountain of Italian debt has since risen far beyond the once-terrifying EUR 1900 billion threshold. Italy is currently looking at a heap of debt of EUR 2300 billion! And with the recent change in government, we might expect a further escalation of the matter.
The Italian coalition government, consisting of populist leftist and right-wing parties, has already announced massive public expenditure increases. Some experts expect additional expenditures in the range of EUR 100 billion per annum. Among the goodies the new government is considering are a fixed minimum wage for all of EUR 780 per month, lower pension ages, and free, state-organized child day care.
So far, markets do not appear to have taken much notice of all of this. Nor do they appear to be considering other hot spots in Europe as critical, or even worthy, of a closer look. Italy may be the most obvious Achilles heel of Europe. But there might be more than one!
Check out our Digger Quarterly!