French President Francoi Hollande, German Chancellor Angela Merkel, and Italian Prime Minister Matteo Renzi (Kay Nietfeld/European Pressphoto Agency)  Europe's crisis has entered its phony war phase.  Markets are rebounding, fears are fading, and people are wondering whether Britain will really leave the European Union after all. While incoming Prime Minister Theresa May claims that "Brexit means Brexit," she originally opposed it. And, more to the point, it still is not clear when she might actually get around to initiating Britain's divorce proceedings with Europe. The longer she waits, though, the more the uncertainty might hurt their economy — in which case, staying might start to look a lot better than going. Britain's exit, then, might end up being much ado about a non-binding referendum.  But that doesn't mean all is quiet on the financial front. Even if it doesn't happen, Brexit has reminded us that Europe might have done enough to stop economics from pulling at its seams, but not politics. And it is not just investors who have noticed; voters in other countries have, too. They have seen Britain put the European Union to a metaphorical show of hands and want to do the same. So if it's not Brexit — or especially if it is — then it will just be another portmanteau.  Maybe "Italeave" or "Itexit." Whatever it is, though, it'll be a lot more serious if it's a country that, unlike Britain, uses the euro. Then we won't be talking about just renegotiating some trade deals. We'll be talking about what economist Barry Eichengreen has called the mother of all financial crises. That's because everyone would try to get their euros out of the banks before they could get turned into, say, lira that wouldn't be worth anywhere near as much. And that's why Britain's vote actually pushed Italy into a deeper hole than any other country. This is where the battle for the euro, the European Union, and maybe even a united states of Europe won't be won, but might be lost — regardless of the state of the Standard and Poor's 500-stock index.  The question you have to ask yourself is cui bono from the euro. And the answer sure isn't Italy. Its economy has only grown 5.5 percent, in total, in the 17½ years it has used the common currency. Of course, the euro isn't the only reason for this, but it is a big one. You can tell from the fact that Italy still has 11.5 percent unemployment even eight years after the Lehman Brothers collapse.  This is a populist powder keg that might not even need a spark to ignite. But it might get one anyway if Brussels's bureaucrats have anything to do about it. The problem, you see, is Italy's banks. Their business model does not really work when borrowers don't have to pay much interest. Not that any business model could work when borrowers can't afford to pay any interest after a decade of disappointing growth has left them worse off than they thought they'd be. The result is that Italy's banks have lost a lot of money — 17 percent of their loans are nonperforming — and don't have a lot of ways to make it back. The only good news is that the country's bankruptcy process is so protracted that none of this is an issue today or will even be tomorrow, although it would be nice to figure something out soon.  Now, you might think the E.U.'s rule against taxpayers' bailing out banks unless bondholders have already bailed them in would be politically popular here. But you'd be wrong. While the words "bank bondholder" may conjure up images of a monocle-wearing fat cat chuckling at the plebes, the truth is that they are plebes — at least in Italy. A lot of them are people who bought what they thought were pretty safe investments from their banks. So telling them that they didn't, that the government is going to take their money to make the banks whole, isn't the easiest thing in the world. In fact, it drove one retiree to suicide after he lost as much as 110,000 euros in a small bank bail-in last December. So it's no surprise that Italian Prime Minister Matteo Renzi doesn't want to repeat this with the country's biggest banks. Instead, he has threatened to ignore the European Union's bail-in rules and bail-out his banks to the tune of 40 billion euros.  This is a dangerous time for Europe. In just a few years, Italy's anti-euro, anti-establishment, anti-everything Five Star Movement has gone from being just the protest party of a comedian — no, really — to being an actual one that has captured the mayorships of Rome and Turin. And even more than that, the latest polls show that it has passed Renzi's Democratic Party as the country's most popular one. That, of course, is the last thing Renzi can afford when he is called for a constitutional referendum in October that's really more of one on his own government. Indeed, he has said he will resign if he loses the vote. Which is why it would be semi-suicidal for Europe to insist that Renzi carry out unpopular bank bail-ins right now. All that would do is make it more likely that the Five Star Movement would really get a chance to pull Italy out of the euro — with the rest of Southern Europe perhaps not far behind.  Europe is a place where everything is impossible. Countries won't do what it would take to leave the euro, because that would destroy their economies. And Europe won't do what it would take to make them want to stay, because that would destroy their rule book. So it has been a stalemate between economics and politics. At least so far. This might change, though, if populists come to power. They are a bit like nudists who point out that the emperor has no clothes. Well, yes — but what about yours? In other words, they're right enough to see how bad the euro has been, but wrong enough not to see how bad leaving the euro would be. They may just say damn the economic forecasts, full speed ahead.  So don't listen to the stock market. Politics will have its revenge.  Italy's bank shares have been plunging, shaking the financial foundations of the euro zone's third-largest economy and threatening contagion to other EU nations. (Reuters)
Italy has all the ingredients for a major economic and political crisis — and this one won't be easy to ignore.