“Business As Usual” The Least Likely Outcome In Europe’s Elections

 

 

Europe is heading into the Great Unknown, as Monday’s post highlighted. The UK, The Netherlands and France are not the only political uncertainties that we face. Elections are also due in Italy and in Germany.

   Italian elections. After premier Renzi’s referendum defeat last year, it seems like that Italy will hold elections this year, probably in the next few months. A the moment, the most likely winner is former comedian Beppe Grillo. As I have discussed before, his main policy is for a referendum to exit the euro, but stay in the EU.  But, of course, it is also possible that the current Gentiloni government might survive until the scheduled election date in 2018.

If Grillo wins, the entire European banking system is likely to go bankrupt, as well as the European Central Bank (ECB). The reason is that leaving the euro, and returning to the lira, would inevitably lead to a major devaluation of at least 20%. As the ECB is the main owner of  Italian government debt, thanks to its Quantitative Easing programme, it also would go bankrupt. As Astellon Capital note, the critical legal issue is that the Bank of Italy is privately owned by the Italian banks – not state owned.  The ECB claims the government would still be responsible for the debt, but investors and other governments are unlikely to wait around for Italy’s slow-moving courts to reach a decision.

   German elections. In October we then have the German elections, where Angela Merkel is seeking a fourth term. Her credibility has been badly damaged by her handling of the refugee crisis, although most polls suggest she is still the favourite. Germany also has a growing challenge from an anti-EU party, the Alternative für Deutschland (AfD).  But her main opponent is the new pro-EU leader of the Social Democratic Party (SDP), Martin Schulz.

A win for Merkel would obviously be “business as usual”.  But if Schulz wins, he would bring a new dimension to the political debates over the future of the EU, as he was the President of the European Parliament until he resigned to seek the leadership of the SDP. Whereas Merkel saw herself as a “safe pair of hands”, Schulz is likely to be a more activist Chancellor, if elected. His reputation at the Parliament was of “someone who got things done”. But his actual policy objectives are unclear at the moment.