The sick man of Europe (1)

In an article in the Globe and Mail, sub-titled “Forget Greece or Brexit: This could be Europe’s biggest crisis yet,” financial journalist Eric Reguly says that “Italy is cluttered EUROZONE-IN-CRISIS-Italy-blames-Brexit-to-try-to-bend-EU-rules-to-secure-bailout-ITALY-is-desperately-scrambling-to-rescue-its-684393with ailing banks, big and small, that are stuffed with non-performing loans worth an astounding 18 per cent of Italian gross domestic product – among the highest in Europe and the world – the result of a long, deep recession that has bankrupted tens of thousands of businesses … [and there is a] … banking disaster that has gripped Italy and triggered a government crisis whose repercussions could lead to the collapse of the centre-left government of Prime Minister Matteo Renzi as early as this autumn … [and] … Mr. Renzi wants to use public money to bail out the lenders teetering on the edge of the cliff, but the European Union’s new bailout rules mean that bank investors – mostly the holders of the banks’ senior and junior debt – have to take a hit before a taxpayer-funded capital injection can even be considered.

sick_patient_in_a_hospital_on_a_gurney_getting_an_iv_0515-1104-2203-3220_SMU

This is, of course, not the only financial crisis in Europe ~ I will deal, later, with other “sick men of Europe” ~ but, given the size and importance of Italy’s economy, it, with Canada, is a G7 member, after all, it might be the most dangerous to the € and, indeed, to the European project. In some respects it might be easier to deal with the good, healthy, solid, well managed, generally fiscally conservative, economies in Europe, but they are few in number and they will have to find ways to survive the trials and tribulations of their less responsible neighbours.

The Italian crisis reinforces two points:

  1. The Brexit negotiations, when they happen, will occur against a backdrop of a weak Europe that might need Britain as much as Britain needs it; and
  2. There are good reasons why so few countries are willing to ante up the 2% of GDP for defence that NATO wants ~ there are more politically pressing demands for every €: people want money in their pockets, not in the pay packets of soldiers or the bank accounts of arms merchants.

Mr Reguly goes on to explain that Italian Prime Minister “Matteo Renzi was not supposed to inherit a banking crisis, certainly not one that could sink his short career, threaten the fragile EU recovery and potentially deliver an existential threat to the euro …[but] …  Any bank crisis in Europe is, by definition, potentially more serious that one in North America because banks play a more significant role in the financing of the economy. In the United States, the capital markets finance more than two-thirds of mortgage and corporate debt; banks provide the rest. In Europe, banks provide more than 80 per cent of the lending to the real economy. European companies rarely bother with initial public offerings, relying instead on carefully nurtured bank relationships to fund growth … [and] … The financial crisis in 2008, highlighted by the collapse of Lehman Brothers, sent shock waves through the entire European banking sector. The damage has yet to be fully repaired. Once mighty Deutsche Bank has yet to recover and trades at a mere one-quarter of book value. Britain’s June 23 vote to leave the EU walloped the banks again.

He further explains that, “the Italian banks were falling apart under Mr. Berlusconi’s watch because the Italian economy, by then in a double-dip recession, was a mess, pushing non-performing loan portfolios to ugly levels. Bankruptcy rates were soaring, entire industries were hollowed out as factory orders plummeted and struggling banks choked off loans to the real economy. Plummeting interest rates damaged the banks’ profitability by narrowing loan spreads … [and] … The lack of a Europe-wide response to the banking crisis did not help. Nicholas Spiro, a partner at London’s Lauressa Advisory, notes that the EU lacked the equivalent of TARP, the $700-billion (U.S.) Troubled Asset Relief Program, which was launched by the U.S. government after the Lehman Brothers collapse to buy troubled loans and securities and shore up the banks’ capital. “[German Chancellor] Angela Merkel did not want to foot the bill for Southern Europe’s profligacy,” he said. “The lack of a TARP equivalent is the most conspicuous failure of political and economic governance of the euro area” … But Italy was its own worst enemy. Gross domestic product and productivity growth have been negligible since the country adopted the euro in the late 1990s. Widespread corruption, a sclerotic judiciary, a bloated bureaucracy and perennial political chaos have ensured Italy’s underperformance in recent decades. Since 2008, the country has lost more than a quarter of its manufacturing base. Its debt-to-GDP, at 133 per cent, is second only to Greece in Europe and gives it no fiscal breathing room.

Remember, please that we are dealing with, by most measures, the 8th largest economy in the world ~ larger than Canada’s economy, larger than Australia’s or South Korea’s, too. Vladimir-Putin-coolThe Italian economy is larger than Spain’s and Sweden’s combined. It really, really matters in Europe and in the world. A financial crisis in Italy will further weaken both European unity and the € and make Russian opportunistic adventurism even more likely ~ threatening peace, too.

Canada has some useful cards to play here:

First: help Europe militarily. Forget about rubbish heap UN peacekeeping missions in Africa and deploy a large, credible force to Eastern Europe to keep a real peace against a real threat; and

Second: push for free(er) trade ~ completion of the CETA and a Canada/UK free trade deal ~ with Europe. It is trade and commerce that will help Europe to recover.

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