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July 11, 2016

Forget Brexit, Italy May Fall in October

There are symptoms and there is core causation to economic events. There are excuses and their area reasons why financial events unfold the way they do. Societie Generale’s Albert Edwards thinks investors need to keep their eye on the ball. Stop bemoaning Brexit. There are bigger fish to fry and issues to tackle, some of which could dramatically impact the economy and markets going forward, he wrote in a July 8 report titled “Brexit is a symptom, not the cause of our problems, but who’s next Italy?” The report comes just days after he said Brexit was an issue in the rear view mirror and pointed to other issues to focus on.

Take emotion out of the Brexit analysis and see the real economic issues

Edwards looks at the 2008 financial crisis and says it was not Lehman Brothers that was causation. Lehman was a symptom of an economic engine already in decline. Likewise there is Brexit, an issue he notes has been accompanied by some of the most emotional ranting he’s seen – on both sides of the argument, including his own. Brexit will be used as an excuse for all sorts of economic ills, but it is only a symptom, a benchmark for a larger trend.

When he takes off the emotional hat, he says the real issue is the continued dismantling of the European Union that is upon which savvy investors should focus. There is a game of dominoes being played out and Brexit was just the latest move in a trend.

“In the aftermath of the Brexit vote there is an increasing fear of other dominoes falling within the heart of the EU – the eurozone,” Edwards wrote. “Italy is bleeping very loudly on most people’s radars with its banking crisis and impending referendum seen as leaving the country on a knife-edge.”

The Italian banking crisis is important, but it is not the primary problem. “It is a symptom of the problem that problem being a perpetually stagnant economy and deflation,” he wrote. “Italy simply does not appear to be able to grow inside the eurozone and more importantly probably never will.”

Italy may fall in October or may not, but it will eventually occur

But it is not just Italy that could be part of the trend extension, the trend could be extended across Europe. In making this analysis, Edwards does not cite all too simple issues of immigration, fear of globalization or a lack of foresight by the slovenly masses who vote. He looks at economic numbers and notes that it’s not just Italy that is at risk of withdrawing from a marriage. There have been economic winners and losers, and they are clear and documentable.

“Indeed the Italian economy has barely grown one jot since it joined the eurozone at the start of 1999 while Germany has grown rich,” he said, pointing to one clear winner with many clear losers. “As inevitably people compare their fortunes with that of their neighbours, the Italians are mighty pissed off.”

But it’s not just the Italians. Based on unemployment figures – an economic number that impacts most voters the most – the entire Eurozone, most notably Italy and France, have seen unemployment rise since joining the union. One country, however, has benefited. Germany, the country that has the most significant influence over regional and central banking affairs, has seen its unemployment drop to record lows.

“What is far more shocking is what has happened to Italy and France,” he wrote, pointing to seldom discussed economic numbers. “Ten years ago not only was German unemployment above that of France and Italy, it was SUBSTANTIALLY above them!”

The Italians have elections upcoming in October that may or may not result in momentum for the “leave” movement. But if they do leave, expect the negocaiations to go very differently than what took place with Greece and what is currently taking place with the UK. “No one-sided negotiations with Germany will occur as they did with Greece. There will be no bluffs.”

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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