Enough time has passed since our analyses were made of the medium term status of European Nationalism and what effects the dire economic condition of Italy may have on Deutsche Bank where we can review how things have shaken out compared to our expectations.
Germany – The tragic news event of the week came from Germany. The news was the marriage of Frauke Petry; the tragedy was that she was not married to me. Her fellow AfD party member, Herr Marcus Pretzell, is now Herr Marcus Petry making him the most fortunate nerd since Kurt Gödel married Austrian dancer, Adele Porkert.
Losing the perfect woman is never easy, but for the sake of civilization this website’s writing mission will, regardless, continue.
With that intrepid spirit we turn our focus to this week’s terrorist attack in Germany and how we expect it to shape German politics. We had previously argued Petry’s AfD was positioned to deny Merkel a majority at next year’s general elections. How well the AfD can act as spoiler depends heavily on its performance in the CDU/CSU’s traditional strongholds in West Germany. At the moment AfD is primarily stealing votes in East Germany at the expense of the Socialist party (SPD) instead of the CDU.
At a minimum a breakthrough for Petry in the West is now more probable following the attack.
But this also makes a previously less likely outcome more likely – the chance that Merkel will not lead the CDU after the election. With the terrible work of the government’s background check system (such as it is) turning into a political scandal, Merkel becomes more and more of an unpopular burden for her party to bear. Although the odds still remain low that she will step aside for the good of the party before election day, the burden she is becoming makes it more likely that she will be told to stand down by her own party if they perform badly enough.
Much will depend on how well Petry can spin her results into a rejection of Merkel’s policy. If she is, Merkel’s well deserved retirement from politics will not be far off.
Italy – Our initial political predictions were on the mark while the economic consequences remain inconclusive. As we anticipated, Renzi’s government collapsed after losing its bet on the referendum; his fall makes early elections likely in the first half of the New Year.
However, the degree Deutsche Bank is vulnerable to economic shocks from Italy (though still a real danger) was not truly put to the test. Italian stock and bond markets were not attacked severely enough in the wake of Renzi’s resignation to have much immediate impact one or other on DB – at least no impact yet visible to outsiders. Instead it was Italian banks that showed signs of wobbliness, and even this became manifest somewhat gradually.
We attribute this lack of market panic to speculators not fully pricing in the likelihood of an anti-euro conservative coalition winning power in a few months; speculators not pricing in the true damage done to already feeble Italian banks; and the Trump stock market boom of the last few weeks creating enough positive momentum to keep Europe’s markets generally afloat.
But this only delays DB’s eventual stress test, it does not cancel it. If the markets have not factored into their plans new elections or the slow moving decline of Italy’s banks they eventually will as these fundamental problems become more manifest.
In the meantime we will stand behind our overall prediction, even if the timing is not right to make a final conclusion about it.