Is this the Beginning of the End – Can the EUR Survive the Summer?

Just a few months ago, the Establishment breathed a sigh of relief as populist parties lost in elections in France, the Netherlands, with Merkel eventually managing to form a coalition government and see yet another term as German Chancellor.

Focus had been on France and Germany, with Macron and Merkel expected to reunite the EU and bring an end to the rise of populist parties across the region.

The Italian election saw both the League and Five Star soften talk of an intention to call referendums to pull out of the Eurozone, with the Five Star – League coalition was eventually formed. The Establishment seemed to have had different ideas and a possible action plan in the event of a populist government.

There had been no talk of a plan to exit, even over the weekend and it should have remained so, but with Italian President Mattarella’s veto of anti-EUR economic minister Savona on Sunday, the Establishment has bared its teeth once more, reminding Italian voters, the region and the global financial markets just how malleable the Establishment is when it comes to the every changing demographic landscape.

While Greece was an appetizer, Italy is an altogether different beast. Any threat of a departure from the Eurozone of far greater significance, not just for the Eurozone, but for the global economy, as any material disruption to Eurozone growth, is bad news all around.

Italy is the Eurozone’s 2^nd largest economy, manufacturing key and with Italy’s mountain of debt, leaving the EUR is not the only thing the markets will need to fear, a default on government debt becoming a real prospect, reflected in Italian government bonds, 2-year yields hitting levels not seen since the birth of the EUR.

The surge in bond yields has not only rattled the global equity markets, with major European indexes following the FTSE MIB Index into the red, the MIB down 3.18% at the time of writing, but also the EUR, which was down a whopping 0.7% this morning to $1.1544. The EUR’s not seen $1.15 levels since November of last year and, with Spanish Prime Minister facing a vote of no confidence on Friday, there could be more shocks in the days ahead and quite possibly talks of Dollar parity should the uncertainty persist in the weeks ahead.

One doesn’t even want to consider a snap election and a Podemos victory in Spain that could ultimately lead to EU Referendum’s in both Italy and Spain in the months ahead.

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Whatever happens, the Establishment may need to rethink its approach towards European politics and the European call for change. Brexit may have been considered an acceptable outcome for Brussels, as they continue to strong arm the British government, but Italy and Spain, well that really would be a head in the sand moment for Brussels that continues to demonstrate just how out of touch it is with what’s going on across the region.