Italian President Sergio Mattarella just blew up the European Union. His refusal of the coalition agreement between The League and Five Star Movement threw the best chance for the EU to face its burgeoning political crisis before it became a full-blown sovereign debt crisis.

With U.S. and U.K. markets closed today the full force of the damage done by the EU’s Hail Mary to prevent the Italians forming a government to their specification is actually muted. Things like this always happen on a weekend where the powers that be have enough time to figure out a messaging game plan and reassure markets they’ve got everything under control.

But, let’s round up a bit shall we?

Italian bonds off 25 basis points (!). The euro flirting with $1.16. Spanish and Portuguese debt sold hard, off 5 to 12 basis points. Gold is off a few dollars.

Mattarella, nominally, did this because he didn’t like the choice of Finance Minister, a man who was in favor of Italy leaving the euro. Whatever, he found an excuse. And someone in one of Berlin, Brussels or Washington told him to give a non-hacker the reins to try to form a government.

As Zerohedge reports this morning, that’s simply a non-starter. There is no way that the Italian parliament will approve another technocratic Vishy government on Italy, circa 2011 and Berlusconi’s ouster during the last flare up of Europe’s intractable debt problem.

No, this has to be about something else. This is simply yet another instance of Europe kicking the can down the road.

Sanctions Uber Alles

Look, at the risk of sounding like a guy with a hammer looking to pound in some nails, I have to think that the re-authorization of the EU sanctions on Russia in July is what prompted this desperation move.

But, if a re-vote in Italy can be put off until August (convenient that) then that gives the Trump Administration another six months to exert maximum pressure on our “allies” on trade and tariffs.

It makes sense that Washington is mostly behind this, but don’t underestimate the stupidity of people like Donald Tusk and Jan-Claude Juncker who will literally burn the continent to the ground before giving up their dream of an Europe united in their Orwellian Nightmare.

It is the U.S., however, that stands to gain the most from this move. As I’ve said in previous blog posts, Italy gave German Chancellor Angela Merkel a way to leave the sanctions regime, move closer to Russia and end the sanctions without having to do anything which looked disobedient to the U.S. empire.

The ECB wants debt consolidation and greater control. For the EU to survive this is necessary. Germans and the rest of the northern countries don’t want to be seen bailing out the “Club Med” countries. That would be interpreted as yet another submission to Washington and New York. Merkel cannot go through horrific debt relief talks like she did with Greece in 2015. It would destroy what’s left of her political capital. If she stands tall against Trump over Iran, however, she gains a lot. The uncertainty over how Trump will react sends the euro down, pressuring the ECB to finally move on dealing with the debt.

Europeans want normalized relations with Russia and open trade, especially German industry. There are tens of billions in investments in Russia and Crimea waiting for the sanctions to end to travel to Russia, especially with such a weak Ruble, thanks to Trump’s moronic sanctions.

Only Poland and the Baltics don’t. But, they don’t matter. It only takes one finance minister to vote against extending Russian sanctions to end them. If Merkel stands up to the U.S. on Iran, it makes it easier for Italy to force Germany to stop bullying everyone into maintaining them.

It looks like Merkel and company want to stand up to Trump over trade sanctions and tariffs. Public opinion turns in her favor strongly if she does.

Own Goal

So, to me, the big loser in the long run would be the U.S. because Italy will force the EU’s hand to finally come to grips with its internal contradictions or break apart. And when that happens, any benefit the U.S. gains from cleaving off countries like Spain and Italy from the EU it loses due to a loss of leverage over them vis a vis Russia, China and Iran.

Trump wants solidarity in pressuring Iran and North Korea to give up its nukes and submit totally to U.S. primacy. Without it he can’t get what he wants. Holding onto sanctions against Russia and invoking a debt crisis in Europe again will unleash chaos that cannot be controlled.

No longer could we use quislings and satraps in the EU bureaucracy to scuttle big projects like Nordstream 2 and force 27 nations to act in our favor. And with Trump going full scorched earth to define who is and who isn’t with him, an EU break up over political divisions works against his stated goals.

But, then again, the Italians may already be a lost cause …read more

From:: The Korelin Economic Report