It is difficult to determine which is the most significant market concern coming out of the European Union. While mainstream eyes appear focused on the French election outcome, reports from Bank of America Merrill Lynch point to concerns in the Netherlands. Add to this general populist market anxiety a new Source report notes concern in France but more specifically Italy, and the EU might devolve into a political mess that could impact markets.

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European Union was founded on the idea those who trade together don’t engage in war with each other

The bookmakers across Europe have been busy calculating the odds of what might be the end of the European Union experiment. On November 1, 1993 the framers of the EU signed agreements in Maastricht, Netherlands with the goal to foster economic cooperation among member states. The founding idea behind the project was to reduce conflict in the region in the wake of the Second World War, with the notion that sovereign regions engaged in trade do not also engage in war with each other.

This sweeping treaty included 30 countries of varying wealth – from struggling or debt besieged Greece, Portugal and Italy to financial powerhouses such as Germany, whose economy has grown the most since the founding of the union.

The February 12 Source notes bookmakers at William hill are predicting Greece leaving the EU at 2 to 1 odds with Italy not far behind at 9 to 4 odds. France, the much discussed next major populist battleground, has 7 to 2 odds and the Netherlands, where the union was conceived, is now at 7 to 1 odds of getting a divorce.

Source takes a multi-pronged approach in a report titled “How could Marine Le-Pen become President?”

EU

Watch for Le-Pen to reach out to Putin for campaign help

Noting market “concern” that populist Marine Le-Pen may take the reins of the French presidency, Source doesn’t think this is the likely outcome.

For engaged market participants “able to avert their eyes” from the ongoing constitutional spectacle in the US, there was a “mini-Eurozone crisis” that is taking place as sovereign bond spreads are widening with increasing velocity.

If France did elect Le-Pen and leave the Eurozone is would likely “sound the death knell” to the European experiment and its institutions “and risk bringing chaos to the financial system.”

Source ultimately thinks Le-Pen will lose – and recommends that the French populist focus on leveraging Russia’s “apparent interest in stirring up the democratic pot,” with a question as to why Le-Pen might want to “call upon (Putin) to dig up some dirt” on her opponents.

Here Source again looks to the odds makers not for complete guidance, but just as a historical milestone of opinion. They currently show Le-Pen with a 9 to 4 chance of winning with her nearest opponent at a 6 to 4 chance.

Italy could be the real canary in the EU coal mine

But don’t just consider France as a potential break-up point in the Eurozone of widely divergent debt to GDP ratios.

With last week’s widening of EU bond yields coming along with a correlated rise in the price of gold – breaking recent trend correlation. To Source, this change in correlation pattern signals the market is looking at the problem differently.

Greek problems are once again front and center as are other political issues, but Source thinks the core of the problem is with one of the region’s largest economies: Italy.

They note that the populist Five-Star Movement is almost the most popular party in Italy. This startling advancement could mean that, if they are included in the government, an EU referendum would likely be the next action item on their political agenda.

Greece is most likely to leave, but Italy, the region’s third-largest economy, is likely to be next. The question becomes: what happens to all that debt that each of these sovereign regions owes to the European Union and the ECB?