Brexit Doesn’t Change The Sad Reality Of Europe by John Mauldin, Mauldin Economics

Europe was already in a shambles before the Brexit vote (read Mauldin Economics’ special report on Brexit implications). The UK’s decision may have made a bad situation more volatile. Europe, however, would still be a mess if “Remain” had won.

  • If Remain had won, refugees from Africa and the Middle East, many with the UK as their destination, would still be struggling across the Mediterranean or taking land routes into Eastern Europe. The EU would still be desperately trying to stem the tide and to accommodate those whom it can’t stop.
  • If Remain had won, thousands of refugees would still be dying as their rickety boats capsized and sunk.
  • If Remain had won, Greece would still be chafing under EU-imposed austerity as its economy endures depression-like conditions. Spain and Portugal would still be wondering if they are next.
  • If Remain had won, Poland and Hungary would still be fighting against EU mandates that disrupt their internal affairs.
  • If Remain had won, several EU governments would still be engaged in deficit spending that exceeds EU guidelines (and the EU’s inability to stop them would continue to expose its inability to enforce its decisions).
  • If Remain had won, the European Central Bank would still be holding interest rates below zero, buying private assets with public money and propping up insolvent banks that must fail if the Eurozone economy is to ever recover.
  • If Remain had won, Russia and NATO would still be facing off in the Baltic Sea, forcing already stretched governments to boost defense spending.
  • If Remain had won, ISIS-sponsored or ISIS-inspired terrorists would still be plotting attacks like the ones in Paris and Brussels.
  • If Remain had won, border checks would still be in force within the supposedly free-travel Schengen zone countries, making one of the EU’s greatest achievements into a mockery.
  • If Remain had won, sizable minorities or even majorities in other European countries would still be agitating for their own exit opportunities. Catalonia would still be trying to separate from Spain. The Lega Norde in Italy would still be agitating for Northern Italy to secede. The Walloons and the Flemish would still want to sunder their ties with Belgium. Marine Le Pen would still be gaining strength in France.
  • If Remain had won, the Supreme Court of Austria’s ruling that an extremely close presidential vote must be taken again would still stand, opening up the possibility that a far-right-wing party might take control of a major European country.
  • If Remain had won, the frustration over immigration and immigrants would still be growing. Nationalism, as opposed to loyalty to the European Union, is a rising tide that shows no sign of receding.
  • If Remain had won, Italian banks would still be down some €400 billion, an enormous proportion of Italy’s GDP. German banks would still be teetering. I’ve written about both before. What I haven’t mentioned is how desperate the situation is becoming for European insurance companies, which are even larger than the banks. Arguably, many are in worse shape in a negative-rate regime.
  • If Remain had won, the growing criticism of the ECB would still be growing, and negative rates would still be distorting European financial markets.

I could go on, but you get the point.

Europe already faced a whole host of serious problems before the Brexit vote. It has done perilously little to resolve them and could make some of them worse.

Now let’s take a deeper dive into the two most dangerous developments in post-Brexit Europe: the Italian banking crisis and the rise of Marine Le Pen in France.

The Italian banking crisis

Italian banks have a big problem: something like €400 billion in nonperforming loans. Imagine a much larger version of Greece (in terms of total government debt and banking problems) only a few years ago, and that’s Italy.

The Italians have successfully extended and pretended for years, but working that magic gets harder every day. With the banks, government debt, the refugee crisis, and now Brexit, Italian Prime Minister Matteo Renzi has his hands full.

Italian GDP is around $2 trillion. At today’s exchange rate, Italy’s nonperforming bank loans total roughly 25% of GDP. Compare Italy to the US, where nonperforming loans amount to only 1.2% of GDP, or $128 billion. If nonperforming loans in the US were 25% of US GDP, they would amount to an astronomical $4.5 trillion.

Italy is one good global recession away from a major crisis. But now that the ECB has decided that it can use the funding mechanisms created in the last crisis, it will be able to print the money, piling the resulting debt on the back of all of Europe. Then, of course, there will be Spain or Portugal or whichever domino falls next.

That brings us to one of the most dangerous parts of Europe: France.

The French gambit

Socialist President François Hollande has not yet said whether he will stand for re-election (he wouldn’t even make it into the runoff), but we know Marine Le Pen of the National Front is running.

She has a fair shot at winning, too. If she does, a National Front victory would be a thunderbolt at least as serious as Brexit.

Le Pen congratulated the Brexit voters in a New York Times op-ed last week, at the end of which she summarized her own manifesto. I’ll quote her at length because what she says is so important. In particular, pay attention to what she says about Merkel and Germany.

Brexit may not have been the first cry of hope, but it may be the people’s first real victory. The British have presented the union with a dilemma it will have a hard time getting out of. Either it allows Britain to sail away quietly and thus runs the risk of setting a precedent: The political and economic success of a country that left the European Union would be clear evidence of the union’s noxiousness.

Or, like a sore loser, the union makes the British pay for their departure by every means possible and thus exposes the tyrannical nature of its power. Common sense points toward the former option. I have a feeling Brussels will choose the latter.

One thing is certain: Britain’s departure from the European Union will not make the union more democratic. The hierarchical structure of its supranational institutions will want to reinforce itself: Like all dying ideologies, the union knows only how to forge blindly ahead. The roles are already cast — Germany will lead the way, and France will obligingly tag along.

Here is a sign: President François Hollande of France, Prime Minister Matteo Renzi of Italy and acting Prime Minister Mariano Rajoy of Spain take their lead directly from Chancellor Angela Merkel of Germany, without running through Brussels. A quip attributed to Henry Kissinger, “Who do I call if I want to call Europe?” now has a clear answer: Call Berlin.

So the people of Europe have but one alternative left: to remain bound hand-and-foot to a union that betrays national interests and popular sovereignty and that throws our countries wide open to massive immigration and arrogant finance, or to reclaim their freedom by voting.

Calls for referendums are ringing throughout the Continent. I myself have suggested to Mr. Hollande that one such public consultation be held in France. He did not fail to turn me down. More and more, the destiny of the European Union resembles the destiny of the Soviet Union, which died from its own contradictions.

The People’s Spring is now inevitable! The only question left to ask is whether Europe is ready to rid itself of its illusions, or if the return to reason will come with suffering. I made my decision a long time ago: I chose France. I chose sovereign nations. I chose freedom.

That does not sound like someone who is going to be all that compromising with Brussels and the EU. There is the real possibility that Sarkozy will be in the runoff with Le Pen, and like Bernie Sanders moved Hillary Clinton to the left, Le Pen will force Sarkozy’s politics even further to the right.

Big changes might be around the corner

I have readers in every country in Europe; it’s not my place to take a side here. As an outside observer, I see a level of frustration and antagonism that is reflected in the US and certainly is evident in England.

Unless this frustration is addressed, it will not help the post-Brexit EU rebuild itself into an alliance that can handle Europe’s many challenges more effectively.

We should not underestimate the EU’s ability to postpone the inevitable. They’ve done it far longer than I thought possible seven years ago. Maybe they will again paper over the unpleasant disagreements and buy a few more years.

Yet I think hanging on is getting harder for them. We may, in fact, be near the big turn.

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