Welcome To The Currency War (Part 23): Europe Will Devalue Or Dissolve
No rest for the wicked. With the shockwaves from Brexit and President Trump still reverberating around the world, the established order is bracing for more bad news. Next up is a December 4 Italian constitutional referendum that might end the reign of centrist Prime Minister Matteo Renzi and replace him with a bunch of anti-euro iconoclasts from the Brexit/Trump part of the spectrum. Here's an excerpt from a much longer, deep-context Guardian UK article:
As the air of insurgency becomes unmistakable, the technical debate over reforming a 70-year-old constitution is in danger of becoming a sideshow. Perhaps the most disturbing poll for Renzi found last week that only 40% of Italians say they will vote on the reform package; 56% consider their vote to be more a verdict on the prime minister, his government and, by implication, the state of the nation.
If that bigger picture still dominates come polling day, it is hard to see anything but defeat for a man once billed as Italy's Tony Blair. After 13 years of a flat-lining economy, Italians are battered, bruised and looking for somebody to blame. Unemployment is running at 11%, but is close to 40% among the young, who made up the bulk of the 107,000 who left the country last year to seek work abroad. The aftermath of the financial crash is estimated to have wiped out about a quarter of Italian industry. The average family income is less now than it was in 2007.
Traditionally among the most enthusiastic proponents of European integration, ordinary Italians are furious at the EU's failure to share the burden of the huge migration surge to their southern shores. Lectures from Brussels on the need to cut public spending and balance budgets, given the desperately straitened times, have added insult to injury. It is no coincidence that a current bookshop bestseller - 1960: The Best Year of Our Lives - is a nostalgic evocation of the Italian postwar economic miracle, when the country's growth was judged to outstrip Germany's.
As initially strong support for his constitutional reforms has plummeted, Renzi has tried to turn the tide. In an attempt to woo an increasingly Eurosceptic electorate, he has begun to talk tough to Brussels, temporarily abandoning austerity targets and threatening to veto the EU budget unless other member states show more solidarity over migration.
Resorting to what opponents describe as scare tactics, he has also drawn attention to a recent spike in the interest rates on government bonds. The markets have become decidedly uneasy at the prospect of Italy becoming the next country to deliver a seismic shock at the polls. "The yield will get bigger if uncertainty grows," noted the prime minister. "That's not a threat: it's just a fact."
A sharp rise in the cost of financing Italy's colossal public debt could spell disaster. But just as the so-called fear factor failed to keep Britain in the EU, there are few signs that Renzi's economic warnings are having the desired effect.
And not long after Italy takes its shot at the status quo, France will go to the polls for a run-off presidential vote pitting far-right François Fillon and extreme-right Marine Le Pen. Check out the latter's rhetoric:
"I think that the elites have lived too long among themselves. We are in a world where globalization, which is an ideology, has forgotten, and put aside the people, the people's interests, aspirations, and dreams," National Front party leader and French presidential candidate Marine Le Pen told CNBC following Trump's election victory.
"They have acted like carnivores, who used the world to enrich only themselves, and whether it's the election of Donald Trump, or Brexit, the elites have realized that the people have stopped listening to them, that the people want to determine their futures and in a perfectly democratic framework, regain control of their destiny. And that panics them, because they are losing the power that they had given themselves," Le Pen went on to say.
The major tenets of National Front's ideology include nationalism, protectionism, and right-wing populism - with strong stances against immigration. A once obscure political party that had no real weight in French politics, the National Front is now a major player.
Envious of the UK's Brexit referendum, Le Pen wants France to leave the European Union. In campaign stops across her country she has championed for more immigration restrictions and has been vocal against radical Islam - very akin to the way Donald Trump carried his campaign. Much like the president-elect's foes, Le Pen's critics have relentlessly labeled her a racist and a fascist.
It's hard to overstate the threat posed by these two votes to the EU — the world's largest economic entity — and by implication to the rest of the global financial system. Italy is the third biggest country in the EU, and France is the second. Let either pull out and the result might be dissolution and the end of the euro. Trillions of dollars of euro-denominated bonds would suddenly be converted to lira or francs, forcing the holders of those bonds to take big losses and impairing bank capital across the continent, leading in turn to derivatives blowing up pretty much everywhere, and so on until the whole house of cards is threatened.
So what does a fiat currency/fractional reserve banking Establishment do when confronted with such a looming catastrophe? What it always does of course: Cut interest rates and ramp up money creation in order to devalue the currency.
Put another way, the only way to ease the burden the common currency places on inefficient countries like Italy and France is to cut the value of the euro to the point where French wine and Italian cars are screaming buys around the world. Those industries grow and hire more people, who in turn are more open to preserving the status quo.
Now combine a massive euro devaluation (which, by the way is already in progress)...
...with a trillion-dollar US infrastructure program financed with borrowed money, and the result might be a world awash in unprecedented amounts of liquidity. If that's not paradise for precious metals then it's hard to imagine what would be.