Europe’s Slow Motion Union

A damaged one Euro coin being held in a vise is pictured in this photo illustration taken in Warsaw September 11, 2012. Germany's Constitutional Court will determine the fate of the euro zone in a keenly-awaited ruling on September 12, 2012 that is expected to give a green light to the region's permanent new bailout fund, the European Stability Mechanism (ESM). REUTERS/Kacper Pempel (POLAND - Tags: BUSINESS TPX IMAGES OF THE DAY)

The lack of a true financial and economic union among the EU escapes notice or discussion.

This means Merkel must effectively allow for more subsidies and debt for Italy, debt which is already supported by the credit of all EU members, all the while protesting loudly about not accepting a debt union. Eurosceptic Alternative for Germany (AfD) has already begun to attack Merkel for “pushing liability for other countries' debts on to taxpayers in Germany.” Yet Macron's idea is precisely that; to turn the eurozone's European Stability Mechanism (ESM) rescue fund into a European Monetary Fund (EMF) with powers to give members hit by sovereign debt troubles short-term credit lines.

Meanwhile, with interest rates rising the clock is ticking for Italy. Nobel Laureate Michael Spence of NYU wrote in Project Syndicate:

“Unlike most eurozone countries, Italy’s nominal (non-inflation-adjusted) growth is too weak to produce substantial deleveraging, even at today’s low interest rates. Other things being equal, a rise in nominal interest rates would thus produce rising debt ratios and further constrain the government’s fiscal space, with adverse knock-on effects for growth and employment. And, unlike most of the rest of Europe, Italy’s real per capita GDP remains well below its 2007 pre-crisis peak, indicating that the restoration of growth remains a key challenge.”

Indeed, the fact that the M5S/Lega government thought to actually put debt forgiveness and Argentina-style liquidity facilities from the ECB on the table says a lot about the real fiscal situation in Italy and throughout Southern Europe.

It has only been a year since the $6 billion state-supported bailouts of the bank Monte dei Paschi di Siena (BMPS.MI), part of a $20 billion bank rescue blessed by the EU. Now it appears that the Italian state itself may require a bailout, requiring another exception to the EU's fiscal rules. Thus, the slow-motion fusion of the EU is well underway. But selling this reality to voters outside of Italy in Germany and France may be another matter.

Richard Christopher Whalen is an investment banker and author who lives in New York City. He is Chairman of Whalen Global Advisors LLC and focuses on the financial services, mortgage finance, and technology sectors. He publishes The Institutional Risk Analyst and contributes to many other publications and appears in media outlets including CNBC, Bloomberg, and The Wall Street Journal.

Image: A damaged one Euro coin being held in a vise is pictured in this photo illustration taken in Warsaw September 11, 2012. Germany's Constitutional Court will determine the fate of theeuro zone in a keenly-awaited ruling on September 12, 2012 that is expected to give a green light to the region's permanent new bailout fund, the European Stability Mechanism (ESM). REUTERS/Kacper Pempel (POLAND - Tags: BUSINESS TPX IMAGES OF THE DAY)

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