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Trading  | March 7, 2018

Authored by Jeffrey Snyder via Alhambra Investment Partners,

There may come a time not too much further down the road when Brexit will have been not quite forgotten but placed into a second tier of European disintegration. In that top level, if it should continue, would reside all on its own Itexit. The Italians not the Britons will goad the question of the euro, and therefore the whole of the European experiment.

By now, the formula is a familiar one. If you are against tighter integration and European Union, then you are a fascist xenophobe, a racist of the first order. Rather than dissuade voters, this has, it appears, worked against those using the slurs who fervently hope to keep the experiment for much longer.

Complete vote tallies are not yet available, but by all accounts the Italians in heavy turnout voted heavily yesterday for anti-establishment, anti-euro parties. Though the Italian parliament could be in for a mess in the near future, euroskepticism and anti-establishment fever dominated to a much greater degree than anticipated (for yet another election). Even the mainstream commentary written ostensibly to describe what’s going on can’t refrain from locking out reality:

After establishment parties managed to contain populists in German, French and Dutch elections over the past twelve months, their defenses were overwhelmed in Italy as voters rebelled against two decades of lackluster economic growth and a surge in immigration. The upshot is a far more unpredictable partner for European leaders such as Angela Merkel and Emmanuel Macron as they face the U.S. threat of a trade war while trying to reform the bloc.

This Bloomberg article (predictably) distills Italian economic angst as “two decades of lackluster economic growth” for the transparent purposes of delegitimizing voter dissatisfaction. A more honest paragraph would have been, “It’s been bad for twenty years, why are they now rebelling? Immigrants.” It wouldn’t have been any more true, just stripped of its obvious bias and the misanthropic intentions behind it.

It is technically true that Italy’s economy has been one of the more chronic underperformers, and yet it still can also be the case where that underperformance has changed. Up until 2008 or so, Italians may have been characterized as if not satisfied then at least apathetic about the lackluster nature of their economy under the euro. I don’t think that’s actually true, however, as the EU itself was popular in that country up until the worldwide “dollar” panic.

What explains the revolt now is the recovery from that panic; or the lack thereof. As I’ve written before, the dynamic becomes explosive simply because the Italians, like Americans and everyone else, have been told repeatedly that their economy has not just recovered but recently it is booming. For many, it might be.

That’s not the issue, however, as in any economy there are always proportions doing well and those not doing well. When far too many reside, and stay, in the former, that’s where trouble starts. And when those people left out of whatever economy hear repeatedly that things are really good and they can’t find exactly where that may be, mistrust and blame are surely the only guaranteed results.

The irrational fear of robots is of the same predicament. In not being given any candid answers, people will make up their own minds as to why they can’t seem to experience these boom times. Immigration is a similar if more complex issue (we have to take into account social as well as economic factors).

But even that general review understates the severity of the problem to a considerable extent. Even those who are employed, which is significantly less in Italy as a proportion of the population, they aren’t making much if any progress, either. This lack of opportunity can and does become palpable, a frustration that must be met with honest assessment but in this lost decade rarely if ever is.

Economists don’t countenance anything but recovery. It doesn’t matter how much evidence is stacked up against it, they will claim it’s there, or if pressed that it will be here tomorrow.

This view starts with a conclusion and then seeks evidence for it. The technocracy is defended at all costs, even when it’s most striking feature is its total incompetence. In July of 2012, Mario Draghi promised to “do whatever it takes” to preserve the currency, and thus in political terms to keep the integration dream alive.

Most people saw it as a noble gesture, the hard-pressed efforts of a committed statesman to help out the ordinary folks of Europe suffering under financial repression for reasons they couldn’t understand. These people should have instead heard Mario Draghi for what he was, an utterly confused near lunatic:

The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now — and I think people ask “how come?”– probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis.

Like his predecessor Jean-Claude Trichet or Ben Bernanke, his counterpart at the Federal Reserve in the US, Mario Draghi has no idea what happened in 2008, or, for that matter, what happened again in 2011. His central bank like all central banks is trying to fix a problem they can’t understand, and the effect of doing so is that nothing ever gets fixed.

People might be understandably upset by that fact. It doesn’t take much to acknowledge that these voters might have a case, legitimate criticisms that have nothing whatsoever to do with the darker side of Europe’s tragic history. Economics, however, is the most fragile discipline perhaps ever invented; it prevents even a modicum of honest introspection, largely because it is more of a political force (farce) than a scientific one.

Nowhere is that more evident than in Europe. The risk to the European political situation is not really all that complex. It is easily attributed to the one thing nobody is allowed to question:

The threat to the euro is today greater than it was in 2012, and for that Draghi has completely failed. It comes not in Target II imbalances and Greek default penalties, but in political upheaval tied directly to what it is that Mario Draghi can’t seem to figure out. He can promise all he wants, but Europe’s fate will not be determined by his euro.

It’s recovery or bust for Europe, the same choices as are being faced around the rest of the world for the very same prolonged stagnation. In China, as noted earlier, they are moving in preparation, it appears, for the bust. European voters might seem as irrational, but only if you think the euro was and is like a bumblebee in the capable hands of the brilliant technocratic beekeepers.

It hasn’t been two decades of economic problems, just the last one has been more than enough to turn Italy against that which it once enthusiastically embraced. The breakup began in monetary destruction, nurtured by mistake after mistake, and now moves ever closer to completion drawn forward upon technocratic uselessness covered only by political shrillness. Are we really supposed to wonder why it hasn’t been a winning formula at the ballot box?

If anything, I think Italians, the British, Americans, etc., have until recently all shown remarkable restraint. They gave the technocrats the benefit of the doubt time and again, with dubious policies and experiments and then promises that haven’t come close to being kept. Ten years is a long, long time for nothing being accomplished. That’s really all there is to it. It’s just that simple. 

You want to save Europe? You can start by ending all this blatantly dishonest boom nonsense.

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