Many may think that with the failure to elect anti-European Union candidate Marine Le Pen as French president, the EU is safe. However the underlying problems with the EU still remain. Italy looks to be the biggest risk currently. See how the EU inflation rate reaching 2% may be what creates a big problem for Italian government bonds…
By Justin Spittler
France’s new president can’t keep the European Union together.
In early May, France elected globalist darling Emmanuel Macron. His victory gave the EU a short-term boost. However, it did not change the fundamental problems with Europe’s artificial mega-state.
Doug Casey agrees…
I think it’s unlikely the Europe of tomorrow will look anything like the picture below.
A Fool’s Vision of Europe’s Future
Europe is far more likely to splinter and eventually resemble the map below. It shows what Europe would look like if all its current separatist movements were to succeed.
Europe—If All Its Current Separatist Movements Succeed
Right now, Italy is Europe’s weakest link.
Italy has one of the most indebted governments in the world. It’s borrowed over $2.4 trillion. Its debt-to-GDP ratio is north of 130%. (For comparison, the US debt-to-GDP ratio is 104%.)
But the situation is actually much worse.
GDP measures a country’s economic output. However, it’s highly misleading. Mainstream economists count government spending as a positive when calculating GDP. A more honest approach would count it as a big negative.
In Italy, government spending accounts for a whopping 50%-plus of GDP. Remove that from the calculation, and I suspect we’d see how hopelessly insolvent the Italian government truly is.
In other words, Italy is flat broke.
I don’t see how the Italian government could possibly extract enough in taxes from the productive part of the economy to ever pay back what it’s borrowed.
Meanwhile, Italian government bonds are in a super bubble…
They’re currently trading near record-low yields. (When bond prices go up, bond yields do down.)
Over $1 trillion worth of Italian bonds actually have negative yields.
It’s a bizarre and perverse situation.
Lending money to the bankrupt Italian government carries huge risks. So the yields on Italian government bonds should be near record highs, not record lows.
Negative yields could not exist in a free market. They’re only possible in the current “Alice in Wonderland” economy created by central bankers.
You see, the European Central Bank (ECB) has been printing money to buy Italian government bonds hand over fist. Since 2008, the ECB and Italian banks have bought over 88% of Italian government debt, according to a recent study.
This is stunning.
It means that Italy’s financial system depends completely on ECB money printing.
Italian government bonds are, without a doubt, in super-bubble territory. It won’t be long before a pin pricks this bubble and… pop.
That could happen soon.
Earlier this month, the credit rating agency Fitch downgraded Italy’s credit rating from BBB+ to BBB.
And Mario Draghi, the head of the ECB, recently announced that after five years of manic money printing, he’s finally achieved his wrongheaded goal of 2% inflation.
Now that the ECB has reached its 2% inflation target, Germany and other EU countries are pushing the central bank to stop printing so much money.
This is the last thing the Italian government wants. Remember, the ECB buys a lot of Italian government bonds with those freshly printed euros.
If the ECB stops buying Italian government bonds, who will step up? The answer is nobody… Italian banks are already completely saturated with government bonds.
Germany wants the money printing to stop. Italy wants it to continue.
But, since the ECB has reached its stated inflation target and Germany has crucial elections later this year, I think Germany will get its way.
This is very bad news for Italy’s government and banking system.
Once the ECB—the only large buyer—steps away, Italian government bonds will crash and rates will soar.
Soon it will be impossible for the Italian government to finance itself.
Italian banks—which are already insolvent—will be decimated. They hold an estimated €235 billion worth of Italian government bonds. So the coming bond crash will pummel their balance sheets.
It’s shaping up to be a lovely train wreck.
I think we’ll see a full-blown crisis in Europe soon.
So, why should Americans or anyone outside of Europe care?
The EU is the world’s largest economy.
The euro currency is the second most widely held currency in the world.
Financial chaos in Europe means financial chaos worldwide.
The Financial Times commented on what would happen if the EU were to collapse:
It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.
A crisis in Europe would send a lethal lightning rod through the world’s currency and stock markets. Unparalleled economic turmoil—far worse than 2008—could follow.
P.S. New York Times best-selling author Doug Casey and I just released a time-sensitive video revealing how this could all play out. Click here to watch this video now.