By George Friedman
The Spanish People’s party in Spain failed to achieve a majority of seats in parliament and while they remain the largest party in Spain, it is not certain that Mariano Rajoy will retain his position as Prime Minister. The damage was done to Rajoy by a surge of the liberal Ciudadanos party, which won 40 seats out of a total of 350, as well as the left-wing Podemos Party, which took 69 seats in parliament and cost Rajoy his majority.
The outcome of the election weakened but did not destroy the claim that most Spaniards are prepared to endure the austerity program that has been the price for EU assistance. There has been much talk of Spain recovering from the seven-year-old financial crisis. However, the fact is that unemployment in Spain remains above 20 percent, a staggering number.
The most interesting response to the Spanish election results came from the Italian Prime Minister Matteo Renzi who said, among other things, that “It is going to be interesting to see if Europe will now realize that a short-sighted policy of rigor and austerity leads you nowhere.” Renzi also said that “As has already happened in Greece and Portugal, governments which apply rigid austerity measures … are destined to lose their majority,” and “the economic policies thought up in these years by Europe do not help its citizens, and, paradoxically, punish those who pursue them.” He was obviously speaking of Rajoy who is a vigorous supporter of austerity.
Renzi had a serious confrontation with German Chancellor Angela Merkel over several issues at the last summit. He accused the Germans of benefitting from compelling Greece to privatize and then having Germans buy their airport. He also accused Merkel of refusing to have a full discussion on sanctions against the Russians while doing side deals with them on energy. Finally, and most importantly, Renzi and Merkel clashed on EU guarantees for depositors in Italian banks.
This is now a pivotal issue for Italy, which has a nearly 18 percent non-performing loan rate — the percent of loans held by banks that are not being repaid. Four small banks have been restructured, leading to a dramatic suicide by a depositor that had been wiped out. New European regulations will make depositors responsible for knowing the health of banks before making deposits, with Europe as a whole bearing little responsibility for the outcome. At the same time, to boost confidence in its banks, Italy is pushing for the implementation of a Europe-wide deposit guarantee scheme. Under the plan, deposits of up to 100,000 euros would be guaranteed by a European fund.
Renzi and Merkel confronted each other on this issue along the normal lines. Since European integration creates an integrated financial system, it follows that there should be an integrated system to protect depositors who can’t possibly be expected to know the bank’s financial situation, or so said Renzi. Merkel for her part, refused this argument and opposes the proposed scheme. Of course Italy has the tottering banking system, not Germany. Germany wants an integrated Europe, but as the most successful economy in Europe it is not prepared to underwrite Italian banking failures.
We have forecast an Italian banking crisis based on the high rate of NPLs. This crisis has now begun to permeate Italy’s relationship with Germany, but it is also impacting the rest of Europe. The decision to impose new rules makes the consequences of a failure even more intense. Italy is facing the immediate problem but a systemic failure in Italy would not leave the rest of Europe undamaged. Italy has the eighth largest economy in the world and the fourth in Europe. If Italy has a crisis, Europe has a crisis. This is not Greece.
It is not the Italian banking crisis — which is not yet here — that influenced the Spanish elections, as much as a sense that is permeating Europe that the crisis that began in 2008 has now become the new normal in Europe, and that it will take a generation to unwind the financial problems, as well as the unemployment problem. There is also a growing sense, fair or not, that Germany has benefitted from this crisis by buying assets at a fraction of their value while working to create rules that insulate them from responsibility for the crisis.
You can argue that case either way, but what can’t be argued is that Europe remains in the grip of dysfunction, and that it isn’t going away. This is creating an internal crisis and constant bickering between nations. The problem is simply not abating and Europe can’t go on this way. Renzi is dismissed by Eurocrats as being unpleasant. He may well be, but the situation in Italy would make any prime minister seem unpleasant.
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