[Remember: Big (or perceived) Crisis = Big Change]
I think it’s safe to say the new crisis just killed the Schengen Treaty. That ridiculous document which guaranteed freedom of movement across the European Union finally hit something it couldn’t bully, COVID-19.
Regardless of whether you believe the pandemic is real or not, the reaction to it is real and is having real consequence far beyond the latest print of the Dow Jones Industrial Average.
The lockdown of Italy isn’t a temporary thing. Oh, the suspension of free movement is temporary, but it portends something far bigger.
It’s the beginning of the real political balkanization that’s coming to the European Union over the next few years. Old enmities and prejudices have not been stamped out under the boot heel of oppressive legislation coming from a bunch of disconnected technocrats in Brussels.
They have only been suppressed.
Because when there are existential threats there’s no time or desire to virtue signal about how we’re all one big happy dysfunctional family.
For decades Germany refused to lighten up on its fiscal inflexibility believing, rightly, that it shouldn’t subsidize profligacy in places like Italy, Spain and Greece if it didn’t want to.
At the same time, however, Germany transmitted those rules to the single currency regime of the euro. That was the price they forced on the rest of Europe.
Now Germans face the existential threat of COVID-19 imported into Europe mostly through Wuhan textiles workers in Milan’s leather shops/ Their leaders will force them to accept looser spending rules.
And do you think this will engender an outpouring of love and affection towards Italians?
Chancellor Angela Merkel has signaled for months she would spend more to satisfy the rising Greens on Germany’s political left.
Her finance minister, Olaf Scholz, unleashed the full force of Germany’s sovereign wealth fund to offer unlimited support to German businesses facing troubles because of this virus.
This is as good a cover story for the gargantuan holes in the balance sheets of zombie German banks as they were likely ever going to get folks.
ECB President Christine Lagarde was brought in to ram through the political changes needed to loosen Germany’s tie. She knew the only way the EU would survive the growing crisis within its non-functional sovereign debt market was to print money to the high heavens.
Or allow the union to break up. But, there is no Door #2 in Europe. All doors lead to Brussels.
So in the midst of this mess comes COVID-19 and the uncoordinated and inept response to it from the political center of Europe to date. Only now are they coming to the conclusion they need to restrict travel, after sitting on their hands for a few weeks while Italians died by the hundreds.
And do you think that’s engendering waves of love and affection among Italians towards Germans?
If you do then you don’t know Italians… at all.
And this is your signal that this is the beginning of the real crisis. Because while COVID-19 may have been the catalyst for the breakdown of capital markets, capital markets were simply waiting for that spark to occur.
Any other type of spark, a bank failure from a run of bad loans, could have been handled and absorbed. There was no Credit Anstalt the central planners weren’t prepared for.
Will Trump spend money he doesn’t actually have? Yes. So what?
That money will go into a logistical pipeline that far outstrips Europe’s to combat a disease over a smaller population spread across larger distances. That limits the damage to the U.S. It ensures political stability that the EU cannot hope to compete with for the trust of spooked capital.
Add the global economy grinding to a halt. We’ll see the crisis emerge in Europe to feed a widening gyre of debt servicing that will look like a global bank run on dollar liquidity.
It will force fundamental reform of the euro and the ECB. They are necessary for the EU to survive this crisis in anything close to its current form.
While this crisis is tailor-made to shove the federalization of Europe down the throats of what’s left of the German middle class, I don’t think it succeeds.
Until Germany is willing to bail out Italian banks, there is no solution to this.
And while I think Merkel is willing to fall on her sword to get this done, It may still not work.
How convenient it is that Merkel’s CDU just cancelled their April 22nd leadership vote because of this crisis. This forestalls any possibility of Merkel losing control of her party until after Germany begins its EU Commission Presidency.
Whatever she has planned she has to do soon. Her political capital is just about spent.
There will be no change of leadership during a crisis like this. She’s almost done completing the sell out of Germany to the EU begun by Helmut Kohl.
Just in time for the whole experiment to come crashing down.
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