Europe Facing a Double Crisis from UK and Italy

Europe is staring down the barrel of a double crisis as Theresa May’s Brexit deal is rejected by her own cabinet and Italy stand firm over their controversial budget.

Hopes of an end to the Brexit confusion were dealt a blow as UK Prime Minister May’s deal has seen widespread condemnation within her own Cabinet and party, leading to resignations from Brexit Secretary Dominic Raab and reports of a no-confidence letter from Jacob Rees Mogg. The British Pound has tumbled on the latest chaos, as German Chancellor Angela Merkel confirmed that there is “no chance” of further negotiations.

May had also said that it was, “her deal, no deal, or no Brexit at all”. The reality of the statement is that there is little chance of the deal gaining enough votes to pass through  Parliament so the chances of a no-deal exit are increasing.

Alongside the threat of a no-deal Brexit, the EU is also facing the threat of another Greek-style debt crisis in the form of Italy; whose economy is ten-times larger than Greece. Italy were given two weeks to submit a revised budget that met the spending targets of the EU and their refusal to budge puts the spotlight back on the EU to see what action they will take. With Italy’s bond yields climbing, the irony is that harsh treatment from the EU could create chaos for financial institutions and the European Central Bank, who have been the largest buyers of Italian debt in the last few years.

italy crisis

Together, both parties own €1 trillion of Italy’s bonds, with non-residents (other banks/investors) owning a further €600bn. These bonds were easy for Italy to service with  record low European interest rates near 0%, however Italy’s 10-yr yield has moved from around 1.5 in 2016 to 3.48% now. 

A crack in the 10-yr yield could put pressure on Italy and see a repeat of the contagion that was created by the Greek bailout request, which led to the EU’s sovereign debt crisis in 2010. If the debt crisis erupts again, the UK government may face pressure to pull the plug on a Brexit and go for the no-deal option.

The next months will be critical for the survival of the European project.