
How the Resignation of Italy’s Prime Minister Threatens the EU and the Euro - joshuafkon
https://www.cassandracapital.net/post/how-the-resignation-of-italy-s-prime-minister-threatens-the-european-union-and-the-global-economy
======
DATACOMMANDER
The constant allusion to invariably vague doomsday scenarios that fills
articles on the global economy is quite grating. What would really happen if
Italy defaulted on its debt and started issuing its own currency? I suspect
that the answer is no more and no less than, “Bond holders would lose money.”
But so what? What is Germany going to do, invade Italy? Somewhat surprisingly,
I can think of few things less politically feasible in 2019 than Germany
invading another country. I think that the political impossibility of direct
military conflict between developed nations is actually the cause of the
hysteria that permeates the media whenever one threatens to default. All that
the creditors can do is scream bloody murder at the top of their lungs and
pray that the debtors don’t call their bluff.

~~~
joshuafkon
Respectfully, I think the risks from Italy leaving the euro are extremely
underrated.

Italy defaulting on it's debt would be substantially worse than just "bond
holders losing money." Italy has an extremely large amount of debt - if that
debt dropped in value (like mortgage debt did in 2008)it would be catastrophic
for every country in Europe. Who would bailout the entire country of Italy?
That's the problem with sovereign debt, it's too large and there is no higher
entity responsible for bailing it out.

~~~
DATACOMMANDER
What specific, concrete events would occur, and why would the occurrence of
these events constitute a catastrophe? Why would anyone need to “bail Italy
out”? If they decide not to pay back their debt and start using their own
currency, the problem is solved from their perspective. Sure, they’ll have to
pay a much higher interest rate if they want to issue further bonds, but so
what?

Again, please avoid abstract terms when describing this supposed “catastrophe”
that would follow a default.

~~~
joshuafkon
If Italy was to leave the Euro, and pay back their debts in a devalued
currency:

First it was be a massive deflationary shock to have that debt fall in value
(very similar to how mortgage debt falling in value was a shock). Banks in
France and Germany would see massive losses. Because of the leveraged nature
of sovereign debt in the European banking system it would be extremely
deflationary.

Secondly, the debt of every other nation in Southern Europe would also be put
into question. If Italy is going to devalue, how long before Spain, Portugal,
Greece, etc. do as well? And the scale of all this debt is much larger than
subprime mortgage debt was.

Beyond that - imagine the monetary chaos if nations start to leave the euro
and issue their own national currencies again? Will people be hoarding Euros?
Selling them?

If you look back at the reporting from back in 2010 when the European
Sovereign debt crisis was at its peak - you'll see that just about every
serious economist agreed that a sovereign debt crisis and the idea of defaults
had the potential to be very bad.

~~~
DATACOMMANDER
The only concrete effect you’ve suggested is that French and German banks
would lose money. Well, yeah, obviously. So what?

~~~
DATACOMMANDER
I can’t reply to your last reply for some reason, so I’m replying here. I’ll
read the article you linked to, but I don’t expect anything other than more
econobabble and fear-mongering.

If a country’s entire economic system is based on a stupid assumption—in this
case, that a sovereign nation will never default on its debt—then it ought to
collapse. Still, I don’t believe that collapse would actually occur. I think
that a lot of people would lose a significant amount of money and be quite
upset. And then, the next day, the sun would rise, and people wouldn’t be
starving in the streets, and life would generally go on.

~~~
joshuafkon
Hopefully you’re right.

But I think if you look at how the people of Greece have already suffered
since almost having a sovereign debt crisis you’ll agree the potential is
there for it to be quite bad in Italy.

[https://www.nytimes.com/interactive/2015/07/09/business/inte...](https://www.nytimes.com/interactive/2015/07/09/business/international/is-
greece-worse-off-than-the-us-during-the-great-
depression.html?mtrref=www.google.com&gwh=4DDBD9724BFDA10B3F4DABE72365B654&gwt=pay&assetType=REGIWALL)

~~~
DATACOMMANDER
I’ll read both of those articles later; they’re behind a paywall. I’m not an
economist, and I’m open to being shown that I’m wrong, but I still think that
if Italy were to default on its debt, there would only be two inevitable
consequences: French and German banks would lose a lot of money, and Italy
would have serious trouble borrowing at a reasonable rate in the future. I
don’t see how anyone could call either of those outcomes “catastrophic” with a
straight face. But I can easily see why those who stand to lose a lot of money
would want the public to _believe_ that a default would be catastrophic.

------
joshuafkon
Short Version:

The Resignation of the Italian prime minister last Tuesday will likely lead to
the dissolvement of parliament and elections as early as this fall.

With the right-wing League party soaring in the polls there is a very real
chance that they will be able to form a majority government without partners .

This is a risk to the EU and the euro because the League has been vocal about
their plan to issue a parallel currency to the euro called the miniBOT. Having
such a currency will enable the Italian populists to achieve where their Greek
counterparts failed - because the EU will not be able to ensure compliance by
threatening to freeze the banking system and paralyze the economy.

