The rising wave of populism is not something a terminally-weakened Angela Merkel can stop in Europe now.

Angela Merkel knows she’s rapidly approaching a no-win scenario moment as the de facto leader of the European Union.  Last weekend it was next door in Austria with Sebastian Kurz winning. He will form a center-right coalition government in Austria for the first time since World War II.

This weekend’s votes moved against her in stunning fashion yet again as the “Czech Donald Trump,” Andrej Babis won nearly 30% of the vote in an 8-way race.

He garnered nearly three times the support of any other candidate.

Rejecting Merkel-ism

This recent spate of electoral defeats for the EU started with none other than Merkel herself.  She’s yet to form a ruling coalition, though discussions of a ‘Jamaica’ coalition continue between the Free Democrats (FDP) and the Greens.

Europe is moving farther away from Merkel’s positions on immigration and security.  This is making it more difficult for her to negotiate debt relief deals for Italy and Spain and keep control of the rebellious East.

Speaking of Italy, the Northern League successfully organized referenda yesterday that speak to a strong mandate to push for more autonomy for the richer regions of northern Italy.  Veneto and Lombardy both had overwhelming support in favor.  These votes set the stage for a nasty general parliamentary election in May of next year.

I warned about these events in previous articles. The outcomes of these elections would make it more difficult for Germany to dictate to the rest of the EU in ways that Merkel (and her Globalist backers, like George Soros) want.

The Trump Administration is offering Greece debt relief behind Merkel’s back is an ever bigger sign that Merkel’s preferred path of public bailouts funded through the ECB to save German banks exposed to interest rate rises is over.

The U.S. and the International Monetary Fund are abandoning Merkel along with the voters.  She won’t have a political ally in former Finance Minister Wolfgang Schauble as her hatchet-man anymore.

In fact, the longer it takes for Merkel to form a coalition in Germany the harder it will be for the EU to respond to any emergent crisis.

Merkel’s opposition to plans for a more cohesive European Union are getting stronger while she gets weaker.  And as these election results come in it makes French President Emmanuel Macron’s grand plan for a Federalized Europe look not only tone-deaf but an act of desperation.

The End of European Progress

In fact, this thing looks about as dead-on-arrival as Saudi Crown Prince Mohammed bin Salman’s Vision 2030 project is.  The reason for both projects’ troubles are the very geopolitical issues that necessitated them in the first place.

For the Saudis, these reforms are 15 years too late and should have been implemented when oil was $125 a barrel, not after losing a price war with Russia.  For the EU this push towards federalization should have been there from the beginning.  Euro-denominated debt should have been consolidated under the ECB. But Germany didn’t want to give up its comparative advantage and nixed that structure.

So, the events of the past several years, starting with the initial Greek sovereign debt crisis in 2010, are all knock-on effects of that faulty economic and political structure.  It will culminate over the next couple of years with more than today’s stress fractures  Member states will move away from the EU project.

It will result in full on breaks in the backbone of the European Union.

How is Merkel going to continue pressing countries like Poland and Hungary over immigration quotas when electorates across the EU are voting in larger blocs in support of them?

Using the kangaroo European Court of Justice to rubber-stamp obviously tyrannical orders will sit about as well with Eastern Europeans as Spanish Prime Minister Mariano Rajoy’s brutal suppression of Catalan independence.

All of this is setting up a political crisis in the EU that will have big effects on the financial systems there.

Our eyes now need to turn from Germany to Italy to see just how far they are willing to go in defiance of Brussels’ mandates at financial reform.   This weekend’s non-binding votes may wind up being the most important ones cast.

Investment Angle

The situation in Europe will likely deteriorate rapidly in 2018.  Yesterday’s blow out votes in Veneto and Lombardy will only strengthen Five Star Movement in the polls who will call for Italy to leave the euro.  Merkel’s own Finance Minister will likely not back her demand to hold Italy’s feet to the fire.

That’s why the Trump meeting with Greek Prime Minister Tsipras is so important.  It is telling us that the appetite to bail out the banks who made back-stopped bets on EU sovereign debt is no longer there like it was in 2011 and 2015.

Trump will likely force everyone to take a haircut as he knows that those plans do nothing but create a permanent under-class of countries within the EU.  This is exactly what Macron’s federalization plan proposes to enshrine in law.

Some pigs are more equal than others, after all.

So, the investment angle on this is to short the euro on any weekly close below $1.1661, the recent low. 

Moreover, one should be looking to buying high quality gold shares now as gold will begin to break higher once the political instability in Europe bleeds over into the financial markets.

The ECB is trapped and wants to exit its bond-buying program but, realistically it can’t.  Everyone is expecting them to announce a reduction this month.  If that happens it will likely have to be reversed early in 2018 and it will be accompanied by a changing of the rules.

This is what always happens.  It will not be a sign of strength, however, like it’s been interpreted in the past, but rather an admission that there is no Plan B.  And that’s when things get really hairy.