Europe is headed for a breakup. But, after a year of watching the EU establishment work the polls just enough to maintain the status quo in the Netherlands, France and Germany I wasn’t expecting much from yesterday’s Italian elections.
But with turnout over 73% we got just that. Voters were clearly motivated to change the course Italy is on. Now, we knew that Silvio Berlusconi’s center-right coalition would do well alongside upstart Five Star Movement.
The question was always going to be, however, how well would they do?
It looks like it was much better than the polls wanted us to believe. Last week I told you the markets were getting nervous about this election. This weekend the news was all about how subdued the reaction was to the polling.
As if a major technical breakout to the upside on Italian bond yields in the face of furious ECB buying wasn’t a strong enough market response?
The League of 5-Star Gentlemen
It looks like Five Start Movement will take more than 30% of the final tally, which is a couple of points above where polling had it tracking when the blackout went into effect two weeks ago.
The bigger result is that of The League (formerly The Northern League) who came off their secessionist mountain and ran hard on a platform of euroskepticism and anti-immigration.
The most important person in Italian politics right now is The League’s leader, Matteo “The EU can go F&%k itself” Salvini.
When the final votes are revealed, if The League out-polled Silvio “Establishment Stalking Horse” Berlusconi’s Forza Italia! then he has the hammer in coalition negotiations.
This is exactly the situation I was hoping for in this election. Because this paves the way for Salvini to pull out of the weak coalition with Berlusconi and form a stronger government with Five Star.
And at that point the price of Tums in Germany rises sharply on new demand. Because the ‘agita’ over Italy’s untenable banking and debt situation will be enormous.
But, if you want to know what the real issue is just look at this map of Italian unemployment.
1% GDP growth is not something to cheer about when you have this kind of capital destruction for half of a country. And with the euro above $1.20, just like Germany wants it, this is only making it harder for Italy to compete in world markets.
In other words, German strong-euro policy is creating the very election results now creating agita in Berlin.
Politicians are stupid.
They don’t know anything about currency, capital flow or substitution effects… except when it feathers their nests. But, when a policy is inconvenient to them they invariably blame ‘the market’ which is another way of saying ‘blaming the people.’
When the people rise up and vote to end their clown show they cry “Fascism!” or “Populism!”
But this trend is in place all around Europe and it won’t end here. Next month Hungary goes to the polls. It’s leader Viktor Orban and his Fidesz party have the opportunity to grab a super-majority with coalition members and begin altering the Hungarian constitution to the desires of Hungarians, not the EU.
Italy just gave Hungary a big boost of adrenaline to do just that. It also gave Poland an assist in resisting Angela Merkel’s crusade to crush Polish sovereignty for the second time by Germany in under a century.
There comes a point where lying to your people doesn’t work anymore. They can see with their own eyes what’s happening and no amount of gaslighting via polls, economic statistics or Alinsky-style shame tactics works anymore.
That’s what’s happening in Italy. And that’s the beginning of the end of the European Project.
Debt Crisis! Dead Ahead!
Right now the market has been lulled into a false sense of security by the ECB’s manipulation of bond yields via its asset purchasing program, i.e. QE. Five year Italian Credit Default Swap spreads are at a 6-month low thanks to a lack of concern about these election results.
So far, there has been no knee-jerk reaction but that can and will change if Salvini and Five Star head Luigi Di Maio put their heads together and form a workable coalition.
Because Italy’s banking system is more functionally insolvent than everyone else’s (by orders of magnitude) there will be a push by the market to resolve this situation.
For months I’ve been warning you that that all we needed was a trigger to end this counter-trend rally in the euro and firm up the U.S. dollar.
We’ve seen the rush into the euro while bond yields began rising a few months ago. This is an investor class moving to cash pre-positioning for a chaotic market. We’ll see a bit more of this while these results are digested and there is still hope for a Grand Coalition deal between Berlusconi’s center-right coalition and the failing Democrats.
But, more likely is what I just laid out above. So, the next step will be the wholesale pulling out of assets from Europe once Salvini rejects a deal from Berlusconi and he and Di Maio form a government.
And once that occurs, CDS rates will rise, bond yields (already under pressure from a tightening Fed) will rise as well and the next wave of the cycle can begin.
Salvini knows the euro is the main source of Italy’s pain. He’s said as much. Now here’s the opportunity to heal Italy as a country and bring the North, where The League is strong, and the South, where Five Star is strong, together for an Italy which stands up to the depredations of a voracious EU bureaucracy.
As I’ve pointed out multiple times, the German people have no desire to bail out Italy. They wouldn’t bail out Greece, a much smaller problem. They just voted for no bail-outs and are marching in the streets against more strain on their social fabric via Merkel’s immigration policy.
So, the only path forward in Italy’s best interest is Salvini and Di Maio coming together and selling a showdown with Germany over the euro and debt relief. Once they move forward with reforms both Brussels and the IMF will not back the true face of the EU will be shown and I expect an already angry Italy will shift very quickly towards Italeavejust like what happened in the U.K. with Brexit.