[european union eu flag barbed wire]REUTERS/Laszlo Balogh The European Union was a noble dream, but as happens with most dreams, reality eventually sets in. It is simply not possible to maintain economic unity and a single monetary policy among a collection of states each of which sets its own fiscal policies. Europe’s sovereign debt crisis was the first sign that something was structurally wrong. Germany spent years loaning euros to poorer eurozone countries, so they could buy German-made goods. Other exporting nations within the EU did the same. The resulting trade imbalance had to show itself somewhere. It did… in the government debts of countries like Greece, Italy, Spain, Portugal, and Ireland. Now add the political tensions stemming from the migrant crisis and the risk of Brexit… and Europe’s collapse becomes increasingly real. Here, I outline the five biggest internal risks the European Union faces right now. How they handle them will make or break the entire union—and possibly the global economy. RISK #1: ITALY’S BANKING CRISIS Mauldin Economics Italy will probably be Europe’s main headache. Its banking system is already breaking down as nonperforming loans proliferate. Nonperforming loans make up almost 20% of Italian banking system assets. Some southern banks hold nearly 40% nonperforming loans. (By contrast, you should be thankful that nonperforming loans of US banks are down to a somewhat manageable 1%. During the worst of our banking crisis, US nonperforming loans never rose above 3½%. Italy’s level is almost six times greater, and there is not an economic crisis yet.) A collapse of the Italian banking system is a systemic risk for all of Europe. Italy is the eighth-largest economy in the world, only slightly smaller than India. Its economic impact on Europe and thus on the global economy is critical. RISK #2: UNMANAGEABLE GREECE Mauldin Economics Compared to Italy, Greece will seem quite manageable. Greece remains important for another reason, though. It is the main gate through which fleeing Syrians, Iraqis, and others try to enter Europe. The wealthier states need Greece’s cooperation to keep the flow of refugees manageable. Greece is now ground zero for the two greatest challenges to afflict Europe in recent years: the debt crisis and Germany’s insistence on austerity as the only cure, and the backlash against the wave of human migration from war-torn and impoverished countries…. The migrant crisis is already a humanitarian disaster, and the situation is getting worse. The European Union, however, is all but paralyzed. RISK #3: THE END OF SCHENGEN Mauldin Economics The Paris terror attacks in November resulted in the reimposition of border controls through most of the previously open “Schengen” area. The attacks also convinced many Europeans that migrating Muslims are a security threat. An initial welcome turned into fear. One of the key leaders in Europe, Angelina Merkel of Germany, finds herself under intense political pressure because of an anti-immigrant backlash from voters. That brings me to the fourth risk. SEE THE REST OF THE STORY AT BUSINESS INSIDER
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