Is the European Union doomed?
The European Union has been under much stress recently. A combination of the refugee crisis, Brexit, Greek bailouts and a populist wave across Europe has burdened the EU and pro-EU politicians tremendously, while at the same time casting a shadow of doubt over the future of the European Union.
In the Italian banking system, trouble appears to be on the horizon-trouble that most of the media has failed to report on. 18% of Italian loans are nonperforming loans (NPLs), compared to 7% in the US during the worst of the 2008 crisis. This statistic is worse when one considers how interconnected the European financial system is. Italian banks, for example, may take loans from French banks. However, if the Italian bank defaults, the French bank may also default unless Italy is bailed out. This could lead to a chain of defaults that soon spreads across all of Europe, eventually affecting even the strongest European economy-Germany, and sooner or later, spreading worldwide and into the United States banking system. Additionally, companies across Europe also loan from Italian banks, and if these loans are written off, these companies will lose huge amounts of capital. This was a massive concern in 2011 when Greece’s debt crisis spiralled out of control, and it is a massive concern today in 2017, where Italy is on the verge of financial collapse.
Italy could play out very similarly to Japan in the 1990s. After the Japanese stock market crashed in 1989, Japanese banks had massive amounts of bad loans. The government attempt at bailing out these banks led to huge amounts of government debt, as the Japanese banks struggled to “prop up” failing companies or face mass unemployment and a total economic collapse. This, obviously, was just a temporary solution and ended in “Japan's lost decade”, and Japan is now buried in an enormous debt to GDP ratio of 250%, one of the highest on Earth. If what happens in Italy plays out like what happened in Japan, this chaos will be in all of Europe, and eventually, worldwide. To prevent this, the EU allowed Italian taxpayers to bail out Italian banks (while shareholders paid nothing), much to the fury of both Italian citizens and other European nations in a state of economic downturn, such as Spain. These Italian banks may truly be “too big to fail”, but at what cost?
Political friction within the EU is sure to escalate as more bailouts ensue, just as what was seen globally during the Occupy Wall Street protests. Italy even bailed out two small, local Venetian banks, despite the ECB claiming the banks were “not a threat to European financial stability”. With the Greek debt crisis, the EU and the Euro were already under major pressure. With Italy now sliding into potential financial chaos, the future does not look good for the Eurozone or the EU.
The only real, long term solution to these problems is a European Fiscal Union. The Eurozone has proved that monetary union without fiscal union leads to serious imbalances between states, and as a result, debt crises among other things. However, this is a serious breach of national sovereignty and draws Europe ever closer to a “United States of Europe”. Taxes will likely go up. As Forbes points out, there is no way that richer European countries send 20% of their GDP to Brussels to be distributed across Europe.
Can the Eurozone and the European Union last for a few more years? Perhaps it can. More likely however, more bailouts are going to be required to more countries in order to avoid a global economic crash. This results in more political tension, more “EU-Exits” and a drastic weakening or even collapse of the European Union, or at least the end of the Euro.