The EU Is In Imminent Danger Of Total Collapse

The European Union looks more and more likely to break apart and the results will be chaos. In Italy, current Prime Minister Matteo Renzi has staked his government on a referendum to streamline the country's political and electoral system by restricting the size and power of the current Italian Senate. Renzi has been battling to get Europe to engage in some expansionary fiscal policy to no avail and now the electorate has started to turn against him. The main opposition is coming from the Five Star Movement led by former comedian Beppe Grillo whose platform is focused on law and order, economic populism, and social liberalism. High unemployment among the young is fueling this opposition, as it has in France. For the young and those supporting the Five Star Movement, the European Union is simply not working and if they take power from Renzi, we may see Italy make the next move to leave the EU.

The danger in Italy is that Italian banks are still in woefully bad shape while still being major players in Europe. Already, a number of medium sized banks have collapsed or are on the verge of doing so. A collapse of the Italian banking system could set off a whole new wave of contagion that could spread throughout Europe. Even in Germany, the Union's strongest economy, there have been rumblings about the strength of Deutsche Bank.

In France, President Francois Hollande has decided not to seek re-election, much to the relief of the rank and file of the Socialist party. That most likely opens the door for Manuel Valls to become the Socialist's candidate in next year's elections, although no one expects the Socialists to survive the first round of voting simply because the left has splintered and is essentially running four different candidates. The chances that Valls can unite the left is slim as he does not seem to believe in increased government spending or even the 35 hour work week.

If Marine Le Pen wins the election next year, you can be sure that France will also join the parade out of the EU. If the EU isn't already effectively dead by then, then an Angela Merkel loss to the AfD in Germany later next year will finally kill it. What comes afterward is anyone's guess, but it won't be pretty. I'm guessing that history will look back on the leaders of this time and wonder why in the world they desperately held the line on fiscal policy when all the economic lessons of the past have shown that governments need to pick up the slack in spending when the economy collapses, as it did during the Great Recession. That fateful decision could end up making Europe more unstable than at any time since World War II.