Eurozone Day Of Reckoning Coming Soon: Showdown Between Italy And Germany

The eurozone cannot survive without Italy. The serious problem at the moment is the Eurozone also cannot survive with Italy.

Two of Italy’s three largest parties are anti-Euro. The only party in Italy that does support the euro is ex-prime minister Matteo Renzi’s Democratic Party. And with Renzi gone, there’s a huge risk the party splinters.

Regardless, there are no likely scenarios that can keep things from flying apart according Wolfgang Münchau. I believe his analysis is solid.

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Münchau makes a detailed case why the eurozone is doomed in Italy Poses a Huge Threat to the Euro and Union.

He lists five ways the Eurozone can stay intact. However, none of them stands up to close scrutiny.

Italy and Germany could converge. To do this, Italy would need to undertake economic reforms to clean up the justice system and the public administration, cut taxes and invest in productivity-increasing technologies. Germany would need to run a higher fiscal deficit.

The northern European states accept large fiscal transfers to the south.

The EU creates a federal political authority with powers to raise taxes in order to transfer income from high to low-income earners.

The ECB finds a way to bankroll Italian public and private debt indefinitely.

Italy’s government will forever continue to support euro membership.

“Only one of those five conditions may be sufficient for Italy to remain a member of the euro. The problem is that each one is extremely improbable. And I cannot think of a sixth one,” says Münchau.

However, the consensus opinion is that Italy will not leave the Eurozone because the deck is stacked against that event.

The Italy won’t leave rationale looks like this:

The Five Star Movement (M5S) would have to get into power, but the new technocrat government’s first mission is to rig the rules so that does not happen.

Even if M5S wins the lower parliament, it still may not control the senate.

Even if M5S takes complete control of parliament, it would have to change the constitution.

Changing the constitution without a super majority would require a vote.