The cracks first appeared with the Greek debt crisis in 2010. Since then, the European Union (EU) has been put through the mill—and then some.

The latest fault line to rattle Europe is the insolvent Italian banking system. But Italy’s broke banks are just the latest in a long slate of budding systematic risks that Europe hasn’t dealt with. The checklist includes things like Greece’s financial woes, the migrant crisis, sky-high sovereign debt/GDP ratios, and the stability of Deutsche Bank—just to name a few.

As Europe’s problems begin to compound, the question becomes: Is the collapse of the EU imminent?

Turbulence on the Western Front

The continent-wide populist uprising in 2016—as I detailed a few weeks ago—poses a major threat to the survival of the EU ideal. Following the latest populist victory in the Italian referendum, attention quickly turned to next year’s crucial elections across Europe.

First up is the Dutch, who will head to the polls in March.

With just three months to go, things are looking promising for the populists. The right-wing Party for Freedom, led by Geert Wilders, is currently leading in the polls.

Next in the queue are the French, with elections set for April.

France has a history of radical leaders and revolt. Louis XIV, Robespierre, and Napoleon would top that roster. So, what are the odds that Marine Le Pen, leader of the Front National, can win the presidency? The latest polls have Republican François Fillon leading Le Pen by a slim 4 points.

We note that France’s two-round election process erects a high bar that Le Pen must clear. Without a first-round victory, it will be very hard for the National Front to win in the second round. The Republicans and Socialists have so far united to stop the Front National.

Last in line are the Germans and a fall election.

Incumbent chancellor Angela Merkel is going for an unprecedented fourth term. Baring a migrant crisis blowup or some unforeseen scandal, it looks like she will get it. The rise of the populist Alternative for Germany party has been well publicized, but it trails Merkel’s CDU party by around 20 points in the polls.

So, the populists have a chance to grab power in two major European countries over the next 12 months. Still, should we see those upsets, it doesn’t seem likely that the EU is in danger of an imminent collapse into populism. Look how long the Brexit negotiations are taking.

So, what about those Italian banks then?

The Boot’s Broke Banks

Currently, around 18% of Italian bank loans are nonperforming. For some context, nonperforming loans (NPL) in the US only reached 7% at the height of the 2008 financial crisis. The same level of bad loans in the US banking system would be the equivalent of $3.8 trillion—staggering.

And it gets worse. Italy’s banks have less than half the capital needed to cover these loans. They will require around a $40 billion cash injection just to remain solvent. With a tsunami of bad loans on their books, something must be done with the banks sooner rather than later.

So, what about a good old-fashioned bailout?

Given the debt/GDP ratio of “The Boot”—so called thanks to the country’s resemblance to cowboy footwear—just hit a record high of 135%, they are in no position to extend a helping hand. With a government bailout unlikely, the only option left is the European Central Bank. European financial institutions hold a lot of Italian bonds, so they can’t really decline the invitation.

If Italy’s banking system does collapse, which seems inevitable, the EU would be able to absorb the shock. However, it would certainty have major knock-on effects in global financial markets, just as the Greek bailouts did.

And there’s my segue to the start of the EU’s problems… Greece.

Perennial Peril at the Parthenon

There has been scant respite for Greece since its financial woes began in 2010. Thirteen austerity packages and three bailouts later—worth a combined €366 billion—have only made matters worse.

Greece’s debt/GDP ratio now stands at 177%. At 23% (47% for youth), it has the worst unemployment rates in Europe save Bosnia. And bank NPLs are 45%—around €119 billion— equal to over 60% of Greek GDP. Again, truly staggering.

Clearly, something has to be done with Greece, too.

German Finance minister Wolfgang Schäuble staunchly opposes further debt relief for Greece. This is the trap for the Germans and other creditor nations. A debt default would have severe negative consequences and is exactly why the Greeks have already been bailed out three times. Given previous bailouts, and the implications of not helping, it could be more “extend and pretend” in the case of Greece.

Greece’s economic woes have been exacerbated by the migrant crisis. Millions of third-world refugees have landed on its shores en route to the more prosperous North.

So, could the EU collapse under the weight of all its problems?

Conclusions on the Continent

None of these dilemmas will pass without significant pain caused to those involved. Yet, using responses to past crises as a guide, the collapse of the EU is not imminent.

However, the problems facing the continent are severe. It is hard to see how things can continue “as is” for another generation. If the EU doesn’t collapse outright, and it can’t “extend and pretend” forever, how will the future look?

The EU could integrate further into a full fiscal and political Union—the United States of Europe, if you will. But given how unfavorably the EU is viewed in Europe, that would be a hard sell.

A more likely outcome is that the EU remains intact but radically alters the way it operates. To start, nation-states must be allowed to put their interests ahead of those of the Union at the negotiating table. This is already happening—as Geopolitical Futures Chairman George Friedman details in this interview with my colleague Ed D'Agostino.

To end, I quote Winston Churchill:

The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place, we are entering a period of consequences.

That was Churchill speaking three years before the outbreak of WWII.

Scenarios take a little longer to play out these days. The doomsday predictions for the EU may not be as accurate as those Churchill made 80 years ago.

Stephen McBride
Chief Analyst, RiskHedge