A euro crisis has been brewing for years.
Eurozone officials and the ECB have long held the upper hand vs individual countries like Greece and Portugal.
However, Italy now has the upper hand, if it chooses to wage war.
Let’s backup and start from the beginning to tie this story together.
Excessive Debt
Please consider EU Could Slap 3 Billion Euro Fine on Italy for Excessive Debt.
The European Commission could impose a 3 billion euro fine on Italy for breaking EU rules due to its rising debt and structural deficit levels, the country’s Deputy Prime Minister Matteo Salvini said on Tuesday.
Salvini, whose far-right League party triumphed in European elections on Sunday, said he would use “all my energies” to fight what he said were outdated and unfair European fiscal rules.
“Let’s see if we get this letter where they give us a fine for debt accumulated over the past and tell us to pay 3 billion euros,” Salvini said in an interview with RTL radio.
What About France?
France vs Italy Key Points
- The current debate is over excessive debt, not deficits.
- Italy is in defiance of debt, not deficit rules, but its proposed budget will violate both.
- France violates both sets of numbers already, but not by as much.
- In essence, there is one set of rules for France and Germany and another set of rules for everyone else.
Parallel Currency Proposal
Please consider Italy to Activate its ‘Parallel Currency’ in Defiant Riposte to EU Ultimatum.
“I don’t govern a country on its knees,” said Matteo Salvini after sweeping the European elections even more emphatically than the Brexit party. Note the majestic ‘I’. He is already master of Rome.
The Lega strongman can no longer be contained, even by Italy’s ever-ingenious mandarin class. His party commands 40pc of the country together with eurosceptic confederates from the Brothers of Italy. It has erupted like a volcano in the Bourbon territories of the Mezzogiorno, now on the front line of migrant flows and left to fend for itself by Europe. Salvini can force a snap-election at any time.
By some maniacal reflex the dying Commission of Jean-Claude Juncker has chosen this moment to draw up the first indictment letter of the revamped debt and deficits regime. Italy faces €3.5bn of fines for failure to tighten its belt. It has 48 hours to respond.
“We’re not Greece,” said Claudio Borghi, Lega chairman of Italy’s house budget committee. “We are net contributors to the EU budget. We have a trade surplus and primary budget surplus. We don’t need anything from anybody. And we are in better shape than France.”
“I am not going to hang myself for some silly rule,” said Salvini. “Until unemployment falls to 5pc we have a right to invest. We have regions where youth unemployment is 50pc. We need a Trump cure, a positive fiscal shock to reboot the country.” His plan is a €30bn boost led by a flat tax of 15pc.
Concerns Over “Euro Default Risk” Mount
The concerns over Italy have hit mainstream media in the EU, but not the US. For example, please consider German Bundesbank Comes Clean on Euro Default Risks After Italy’s ‘Parallel Currency’ Decree
The German Bundesbank has warned that it could face heavy losses if a major country leaves the euro and defaults on debts to the European Central Bank system, but warned that any attempt to prepare for such a crisis could backfire by triggering a speculative attack.
The analysis is highly sensitive coming just days after the insurgent Lega-Five Star government in Italy passed a decree in the Italian parliament authorizing the creation of a parallel payments system known as ‘minibots’, a scheme decried by critics as a threat to the integrity of the euro and potentially a ‘lira-in-waiting’.
While the Bundesbank text sticks to the standard line that a euro break-up is hypothetical it nevertheless admits – after years of obfuscation – that the ECB’s internal Target2 settlement system entails inescapable costs for Germany and other EMU member states should it ever happen. It also gives the impression that the monetary authorities have no clear strategy for handling such a crisis.
Professor Philip Turner, a former monetary official at the Bank for International Settlements, said the politics of Target2 are poisonous. “This is lending on a huge scale that no government has approved. It is covering fundamental imbalances at the heart of the eurozone system, and it can’t go on indefinitely,” he said.
The International Monetary Fund says it would be hard to prevent a sovereign debt crisis in Italy engulfing Spain and Portugal. The ECB could therefore face a Target2 crisis approaching €1 trillion if Italy’s rebel government sets off a chain reaction with its ‘minibot’ notes – which it claims are needed to cover €52bn of state arrears to Italian contractors and households.
The Bundesbank’s text states that if a country leaves EMU and its central bank defaults on Target2 liabilities, the ECB will have to eat through a series of buffers: first its own capital – dramatic enough – and then by drawing in money from the remaining central banks on a ‘capital key’ basis.\
Not Shocking
There is not a single thing shocking in the preceding analysis other than the discussion is finally taking place at top levels.
I have been discussing Target2 imbalances for years.
- Eight Reasons a Financial Crisis is Coming
- “One Size Fits Germany” Math Impossibility, Get Your Money Out of Italy Now!
- Eurointelligence Displays Stunning Ignorance Regarding Target2
- Another Rebuttal to the Idea that Target2 Claims are “Fictional”
Masters in Circumventing Rules
About one year ago, I commented a Reader From Italy Chimes in on the “Minibot” Parallel Currency Idea.
Hello Mish
Regardless of anything else: Italians are masters in finding smart ways to circumvent rules. There is even an adage in Italy regarding this.
On that basis, I would not be surprised if at one point in time, someone in Brussels or Frankfurt will realize too late precisely what is happening. …..
This was my reply to reader “AC”:
Germany gets to decide between debt mutualization or a breakup of the Eurozone and Italian default on Target2 imbalances. The only other possibility that comes to mind is the ECB prints enough to backstop Target2.
Target2 Imbalances April 2019
Italy, Spain, Germany
- Italy owes creditors, primarily Germany, €481 billion.
- Spain owes creditors, primarily Germany, €403 billion.
- Germany needs to collate €919 billion from debtors.
The above numbers have not changed that much in the past year.
What Has Recently Changed?
The answer is amusing.
To prevent Beppe Grillo and his 5-Star movement from coming into power, Italy changed its election rules to give coalitions more power than parties.
The result is Salvini might win so much support in the next election that he may have a super-majority in Parliament so as to not need a referendum to launch the mini-bot parallel currency.
And so, here we are.
Italy owes creditors close to half a trillion euros. If Italy defaults, the rest of the countries have to pick up the tab based on GDP percentage weights.
Default Percentages
Curiously, via ESM Rules, if Italy were to default, Italy would be responsible for 17.91% of the tab.
Germany would be liable for 27.14% of the tab.
Spain, which already has a Target2 liability of €403 billion would be responsible, in theory, for picking up 11.9% of €481 billion, but that doers not count the 17.9% that Italy would of course not pay.
Upper Hand?
With Greece and Portugal, the ECB had the upper hand.
Who has the upper hand here?
I suggest Italy and I hope Italy uses it.
Mike “Mish” Shedlock
Disclaimer on the spelling of disclaimer.
She conveniently sailed off into the sunset to go deal ivory with her protege R. Magabe. ..hehe…lol
Ps: Declaimer: the Ivory bit not true folks, thats my humour shining through…
She is actually wheelbarrowing money down the corner store to buy some milk and bread…hehehe
May i just reiterate this comment is in regard to the follow up story to this: 8 reasons of oncoming recession. As Mish said Trump blames Fed, Fed blames Trump etc…. and you correct in saying ultimately The Fed…or lets isolate further…. Janet Yellen
Mish, outstanding summary. You nailed it. The meltdown, as you know, could be hours or days off. Yes the Fed is to blame, namely Janet Yellen, for the 10 year QE circus act. People think i have lost my marbles when i declare Janet Yellen as the worst Fed Chair in history, and she should be dragged back, if necessary kicking and screaming, and charged with treason. Set poor Powell up a beauty. He is trying to clean up Yellen’s gravytrain parade, and now Trump breathing down his neck to reintroduce QE coz he dont want the economy rolling over on his watch, in light of 2020 election. Another bandaid over an axe-wound. What a joke…!!!
Mess with central banks 🏦? Hope you have great security.
You owe the bank $1 million and the bank owns you. You owe the bank $100 million and you own the bank
“In light of this mess in Italy and potentially a total collapse of the Union, if you would have savings in Euro’s, which country would you advise to park this in? Germany, The Netherlands, Ireland? Obviously, keeping in mind the deposit guarantee schemes.”
Italian banks are out. Capital controls may be on the way soon. But all banks are suspect because the Euro itself is suspect.
If Italy defaulted, I expect the ECB to print to make up the difference.
This could be years from now or in a month. We are all guessing.
By the way, look at Deutsche Bank. It is going to need a bailout, soon.
I don’t scare easily and I’m not an EU fanboy at all, but when DB fails, I could see a European ‘Lehman event’ unfolding. When that happens, yeah….I’ll be scared.
None of the above.
Luxembourg, the money laundering, tax haven at the centre of Europe, as the Target2 chart bears out.
Would this be like sending Italy to debtors prison? That worked well.
I noticed the same illogical ploy of a fine. Italy borrows because it won’t control its spending. More debt makes Italy less stable. So the Eu wants to make Italy pay a fine that would increase Italy’s chances of default.
Mish (and knowledgable guests), I have a question. In light of this mess in Italy and potentially a total collapse of the Union, if you would have savings in Euro’s, which country would you advise to park this in? Germany, The Netherlands, Ireland? Obviously, keeping in mind the deposit guarantee schemes.
I don’t know if I qualify as knowledgeable, but the partial cause of Target2 imbalances is, Italians shifting assets out of Italy in anticipation of potential exit from euro.
This exit would not solve anything, since Italians would almost immediately exchange their liras to euros. This is happening in other deadbeat countries which are currently not part of euro.
This implies that there is no trust within a population that their compatriots, and so political class (hence deabeat), can be trusted with anything. I am keeping an open mind about Salvini, though.
Switch to Swiss Francs if possible for you.
Don’t be too smug. What we are observing is the undoing of the Liberal Socialist West, including all of the EU, US, UK, Australia, New Zeland and Canada. Governments think that they can bring progress by taxing and spending for noble causes. In this world of limited resources, they destroy personal initiative and scarce capital while borrowing against future tax receipts and running up mountains of debt. There is NEVER enough to satisfy all the “need.”
Further, government produces NOTHING. Government is at best a parasitic institution that protects the populace from other governments, criminals and wanna-be governments such as organized crime. Socialist government wants to go way beyond that. Socialist government tries to make things fair and improve society by coercion, appropriation and taxation. Since there is more “need” than resources, and Socialist government destroys resources by its very nature, it is only a matter of a short time in a historical context until disaster occurs. It is very much re-arranging the deck chairs on the Titanic.
It will not be easy for any of us.
Taxing and spending is indeed not the way to progress, but it is the way to votes. Given that, and also that in order to work a democracy needs an informed and engaged electorate, I’m not “long” on democracy as a viable form of government anywhere.
When you look at all of this, you just have to come to the conclusion that those running the Euro dont have a clue as to what they are doing.
Often decisions are made with little knowledge of why. Even by the decision makers dont know why, but they are able to maintain some sort of semblance of the appearance of informed control. Not so with the Eurozone. No one has a clue what they are doing nor why, and it is obvious that they dont have a clue. They dont understand why they are where they are, nor the first notion of what happens next.
The smartest guys in the room are positioning themselves to be smart after the event when this all comes crashing down.
They know what they are doing. They have a tiger by the tail and everything they do is an attempt to avoid the teeth.
They have created a monster and don’t actually know what to do. The Euro is a Doomsday Machine, just as a few predicated it would be. The Continental Europeans have a rather unhealthy tendency to create tyranny and oppression, and the Euro (and EU) are merely the latest manifestations of this tendency.
When you look at all of this, you just have to come to the conclusion that those running the Euro dont have a clue as to what they are doing.
Unlike those in the US?
“Unlike those in the US?”
In comparison, those at the Fed in the US appear at least, to wield their monetary power in the same way that a master artist wields a brush when creating a masterpiece.
In the Eurozone, it is much more like a drunken hooligan wielding a dirty bog brush.
….if a serious crisis were to materialize, the first country to opt out of the euro cesspool will be Germany, a contingency plan is waiting to be applied with crisp Mark bills ready for distribution…Don t you even doubt it !
That is the only option that makes any sense at all at this point.
Yeah, I’ve heard this many times before. I guess it wouldn’t hurt to have some D-marks again.
If Germany were to try and leave the Euro, what would happen to the almost Trillion Euros they are owed?
Would they need to write this off in compensation for leaving or would they need to tip in more funds to keep the rest afloat?
At one point , throwing good money after bad would no longer be sustainable for Germany, so they might indeed be willing to write off some of the money they r owed ! On the other hand though, nations don t disappear, so the debt or part of it will always have to be paid back…I think….
what would happen is the Euro would approach 0
It will be interesting to see how this plays out. France has been allowed to flout EU rules repeatedly without consequence. Italy should not agree to pay a fine this size under these circumstances.
Europe is doomed. In a few decades they’ll be majority Muslim and the only thing Muslim countries are good at is exporting oil and gas. Christianity was a boom for western civilization while Islam has been a drag on the middle east.
“There is one set of rules for France and Germany and another set of rules for everyone else.”
This iUE a problem, not only for the deficit/debt rules, but the whole de facto decision making process in the EU.