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The possible, even likely, collapse of the European economy would inflict some heavy costs to present European institutions. In this entry, Dr. Peter Nyberg and I detail why we believe we are likely to see some rupturing of the European Union (EU) as originally conceived.

This may occur in two ways: Either the European Union disintegrates completely, or it mutates into something unrecognizable to its original purpose. This comment concentrates on some of the factors causing disintegration.

The functioning of the EU has, until recently, been built on two political pillars that now appear to be crumbling. Primarily, German growth has made possible the joint financing (through low-cost debt, the EU budget ,and the central banks clearing system) of unsuccessful economies without the EU forcing them to commit to politically unacceptable reforms. Beneficent global developments have made possible the concentration on economic integration while going slow on the much more contentious integration of cultural, social, and foreign policies.

The deterioration of the global economy, together with EU policies, now threaten industry and living standards in EU member states, reduce the scope of joint economic support, and force member states to rapidly evaluate their readiness for possibly radical reductions in their political self-determination. This is most evident in Italy.

The yields of Italian sovereign debt have reached levels that can be considered unsustainable, given the countrys high indebtedness and low rate of economic growth. For example, the yield of the Italian 10-year bond breached the 4 percent line late this past week. The maturity structure of Italian debt is also rather unfavorable. At the end of June, for example, Italy had issued only 52 percent of its needs for external financing in 2022. In addition, 35 percent of her outstanding debt will come due already in 2024. Half of her total debt will come due within five years.

Without active country-specific support from the European Central Bank (ECB), which the newly introduced Transmission Protection Instrument is designed to facilitate, Italian debt is unsustainable at current yields. Disagreements among member states on the wisdom of filling the ECB with Italian bonds is bound to weaken the glue keeping the EU together as before.

The energy crisis is also sowing seeds of serious inner conflict. The politics in the EU are becoming less forgiving as difficulties mount.

Both Hungary and the Czech Republic have objected to the plans for a price cap of Russian gas, which now looks unlikely to be enforced. The European Commission is also planning to cut funding for the Hungarian government of Victor Orban due to rule-of-law concerns. This is unlikely to increase the incentives of Hungary to stay in the union. More generally, as funding is made conditional on countries meeting the test of adhering to European values, one can expect the list of such essentially political requirements to grow as economic conditions worsen and demands for uniform policies grow.

For example, Poland is fed up with constant extra demands from the EU, like the demand to walk back from the changes Polish government was planning to the juridicial system, considering the distribution of funds from the Recovery Fund to its government. Krzysztof Sobolewski, the governing partys secretary-general, has warned that without a clear change in the actions of Brussels, We will have no choice but to pull out all the cannons in our arsenal and open fire. Since a number of contentious decisions still require unanimity, such a threat might be unwise to take lightly.

Fault lines are also emerging regarding the Russia sanctions.

Moderation in this respect, as ultimately needed by Germany and especially Italy, is not readily accepted (and may even attract internal sanctions). Russia naturally uses existing differences to reduce the cohesion of the EU. Reports state that Russia is preparing a first shipment from its new liquefied natural gas plant, to Greece. Hungary, as an outlier, is buying additional gas from Russia in accordance with their new agreement. It will be interesting to see what Germany may choose to do if the impact of energy scarcity on its economy and population is as large as some reports suggest.

Besides financially, Italy is also between a rock and a hard place on gas issues. While she has been able to cut Russian gas imports from around 40 percent to 1520 percent, its becoming practically impossible to cut them much further. There are serious bottlenecks dictating how much gas can be transferred from south to north Italy. Essentially, only a sufficient Russian gas supply can keep the lights on in the north of Italy, which is also the industrial hub of the country.

Practically, this means that President Vladimir Putin has the ability to push Italy into a deep recession and create yet another economic basket case in the EU. This time Germany may not be able to guarantee the financing needed for saving Italian companies and the nations banks. If so, yet another debt crisis may well come ablaze in the eurozone. The question is, will the new government of Italy just sit and wait for this, or will it perhaps insist that the EU or itself negotiate a deal with Russia?

So, how will the EU respond to these threats?

We are assuming that European Commission is at some point encouraged to propose a Recovery Fund 2.0, which would need to be considerably larger than the previous one (of around 800 billion). The fund would provide financing for countries to cope with rising energy prices as well as to help the bond markets of Italy, and others, retain market confidence. The ECB may even be forced to restart quantitative easing while it raises rates. Indeed, this may already be happening, as the balance sheet of the ECB has grown by some 13 billion since mid-August.

The commission is likely to try to gather more power for itself through essentially un-constitutional demands, like the preposterous mandatory demand cut for electricity consumption. The commission has no right, legally or otherwise, to prescribe such an action from member states, though reducing demand by itself is a sensible policy at this point and could be the subject of a commission suggestion.

The question remains, will all the member states play ball in this and coming issues? We are not so sure.

Dr. Peter Nyberg retired from a position of director general of the Financial Markets Department at the Finnish Ministry of Finance.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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The European Union Is About to Rupture - The Epoch Times