The Coming Dissolution of the EU

The Coming Dissolution of the EU

by Phoenix Capital Research on 10/25/2014

In Europe, we already know the economy is in tatters. Italy is back in recession for the third time since 2008. Germany’s economy contracted in the second quarter of 2014 and will likely be in recession before the first quarter of 2015. France has registered zero growth for six months now.

None of this should shock anyone. From an economics perspective, Europe has been dead for four years now. Sure, there were little bumps in various data points here and there during that time… but overall unemployment remains at or near record highs, debt continues to grow, and human conditions in some regions now resemble third world countries.

However, the bigger story is one of politics. If you’ve been reading us for some time you know that a key theme for us is that politics drives everything in Europe.

Europe as a whole is socialist in nature. You will never hear a discussion of “how involved should the Government be in the economy?” in most of Europe; it is just assumed that the Government should always be involved to a significant degree.

The question is whether it should be a lot (the public sector accounts for 30% of jobs in Germany) or almost entirely (the public sector accounts for 56% of jobs in France).

In simple form, politics drives the economy and everything else in Europe. This is how Europe managed to squeak through a banking crisis that would have cratered any other region (it will still happen, but down the road). It’s also why the real European crisis will be political in nature. What I mean is that Europe will finally break apart based on politics, not finance or economics.

And by the look of things, it’s just begun.

I’m sure you’re aware of the fact Scotland attempted to break away from the UK earlier this month. What you may not be aware of is that fact that secessionist movements are spreading throughout Europe.

In Belgium, tensions between French-speaking Walloons and the Flemish (Dutch) population have been on the rise in recent years and there is a simmering sense among many in Flanders that they should be independent. Belgium would not simply split in half: it is likely that the map of Europe would have to be redrawn, with Wallonia perhaps attaching itself (de jure or de facto) to Paris and other splinters attaching to Luxembourg. In any event, Belgium as a country would be done and none of these tiny countries would make a major contribution to NATO or European unity.

More likely is Catalan independence, the effort to break up the country of Spain. Spain’s Catalans feel that they carry a disproportionate economic load as their wealth is redistributed around the country. They have an independent history, language, and spirit, and a Catalan “revolt” could re-inspire the vision of a separate Basque state, resulting in the demise of Spain as we know it today.

To the surprise of many, the old Republic of Venice seems to have resurrected itself in 2014. Earlier this year, 89 percent of voters in Venice approved a ballot calling for Venetian independence. Of course, it is unclear what will happen in the future, but united Italy is less than a century and a half old and thus one can imagine parts of it—like Venice—going their own way.…

These cracks in the EU edifice are the beginnings of real trouble. Even larger cracks are emerging in the relationship between Germany and the ECB:

According to German officials, Merkel felt betrayed by Draghi’s speech at a central banking conference in Jackson Hole, Wyoming in August in which he pressed Berlin for looser fiscal policy to stimulate the economy.

Her entourage is also deeply sceptical about Draghi’s plan to buy up asset-backed securities (ABS) and covered bonds in the hope of encouraging commercial banks to lend.

Most of all, politicians in Berlin worry that if this scheme doesn’t work, the ECB president will be tempted to launch full-blown government bond buying, or quantitative easing. This is a taboo in Germany and a step Merkel’s allies fear would play into the hands of the country’s new anti-euro party, the Alternative for Germany (AfD).

Losing the support of the euro zone’s biggest and most influential member state would be fatal for the ECB’s credibility, eroding confidence in its ability to work with governments to get the euro zone economy growing again.

Note that the primary concern for German officials is not that the ECB has no clue what it’s doing… but that if QE fails it will provide fodder from Merkel’s primary competitor in the Germany elections…

Again, politics drives everything in Europe.

How this will all end up is obvious to anyone: the EU Crisis will return and the whole mess will come crashing down.

Prepare now, the next round of the crisis beckons.

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Best Regards

Phoenix Capital Research

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