Europe: The new market cliff

The future of the eurozone hinges on a stronger Italy, but with Mario Monti's bargaining strength now gone from the negotiating table markets should be nervous.

Australian and world stock markets now suddenly face a 2013 danger that they had not anticipated – instability in Italy and therefore Europe. In the next few months we are likely to see the European equivalent of the US fiscal cliff emerge.

The global strength in stock markets in the last six months was partly due to the remarkable Italian prime minister, the non-elected former Goldman Sachs man, Mario Monti. Now Monti is preparing to step down.

And that resignation comes at a time when cracks are appearing in Germany. At the moment all the market's attention is on the US fiscal cliff, but recently I asked one of our leading resource chiefs what he feared most. The answer came back without hesitation – a European crisis

Monti not only bought order to Italy, but in the long exhausting European conferences he had the measure of German Chancellor Angela Merkel.

Just over six months ago I could see how effective Monti was in Europe and I alerted share investors to the likely rise in markets (Super Mario and the Australian bulls, July 2).

Monti understood that Europe faced both a banking crisis (most of the big banks were, and still are, hiding huge losses) and a government-funding crisis. He worked closely with another ex-Goldman man, European Central Bank President Mario Draghi on solutions (Monti, Draghi and the Goldman pact, August 13).

Unlike most other European leaders, Monti understood that if an industrial nation like Italy is to have a common currency with Germany then it must be far more productive. So while one of his first steps was to make it easier to hire and fire Italian workers, it was his ability to outmanoeuvre Angela Merkel to obtain German cash that transformed Europe.

Merkel had rarely had to deal at close quarters with a non-British European political leader who she could not wrap around her finger. Monti could operate with small amounts of sleep and understood that unless Spanish and Italian banks were saved German banks would be decimated causing widespread damage to the German economy. A Greek collapse would also bring on this German crisis. Accordingly, in all night negotiating sessions, Monti could scare Merkel into parting with German cash.

I wrote back in June: "As the months roll on the Germans will come to understand what their sleep deprived leader agreed to under pressure from someone as brilliant as Monti. Another chunk of their wealth has gone to rescue Southern Europe”.

The German population back in June did not understand what had happened

It has taken them six months to realise that Merkel committed real German cash that could have been used for pensions, schools etc to rescue Southern Europe. And they don’t like it (Who'll pull the trigger on the eurozone, December 6).

The simple fact is that Germany and France do not have the strength to alone save Europe. They need a stronger Italy. The previous Italian prime minister, Silvio Berlusconi, now plans to stand again on a platform of Italy leaving the euro. It’s just what Europe does not need.