The fate of the Euro, the EU, and the Western banking system could change tomorrow
In just a few hours the Italian people will wake up and go out to vote on what could be a national referendum even greater than the Brexit vote taken back in June. This is because the outcome of the vote, whether Yea or Nay, could very well determine the futures of not only Italy’s place in the European Union, but also the solvency of Euro currency and of many Western banks.
Italian Prime Minister Matteo Renzi has staked his entire political career on this referendum, and has promised to step down should the vote fail on Dec. 4. And this move would of course create a tremendous power vacuum in leadership, and open the door for more radical parties such as Beppe Grillo’s Five Star Movement to seize power in the nation’s parliament and Executive branch.
But perhaps just as important to the political chaos that a No vote would entail, is the fact that there would no longer be a backstop for the insolvent Italian banks which Renzi provided when he stood firm calling for a sovereign bail-out over the EU’s demand for customer bail-ins. And with this backstop removed the potential of a complete collapse of these banks could lead to a derivatives meltdown that would cascade over to multiple too big to fail banks in Germany, France, and eventually the United States.
Interestingly, and unlike the day before the Brexit vote and U.S. Presidential elections, investors in Europe are not going all in for one side or the other, and in fact many sold off their positions on Friday in anticipation of a potential bloodbath should the referendum vote result in a No.
The crisis in Italy is just the start of a six month journey that could see one or more EU nations change leadership and decide to pull up stakes in the coalition. In fact, right now on Dec. 3 Austria is voting for a new President where the leading candidate is from a political party founded by a former Nazi SS officer.
Whatever the outcome of the next few months, it is assured that the West will experience great change that could see most of the traditions forged since 1999 fall apart in this global return towards nationalism. And while the Brexit event from earlier this year was important, and the election of Donald Trump last month was an incredible blow to globalism, what takes place in Italy tomorrow could be catastrophic to not only the nation itself, but also to the world’s banking systems, markets, and the security of the European Union and its continental currency.