Our fifty states are essentially what the European Unions founders wanted: a giant free-trade zone with a currency union and fiscal union. Its working for us in part because our states, while unique, dont have the centuries of cultural and linguistic diversity that Europes do.The separate languages, cultures, and histories of its nations dont mean Europe cant develop better ways cooperate economically; but the EU structurespecifically the European Monetary Union and the euroclearly isnt the answer.There is no mechanism for resolving Eurozone problemsItalys banks are holding something like 350400 billion in nonperforming loans, depending whose numbers you believe. The vast majority of that amount is not just temporarily NPL; its dead money, up in smoke. The banks are pretending otherwise, and the government is letting them. So is the ECB. This is a fact Europe must face.We forget sometimes that banks are themselves borrowers. If a bank cant collect on the loans it made, it cant repay the money it has borrowed, and the whole edifice collapses. Bank collapse is ugly, and minimizing the ugliness is one reason we have central banks.Huge imbalances exist within the Eurozone with no mechanism to resolve them, and Italy is one of the southern-tier countries that is bearing the brunt.Inflation last month finally reached 1.7% in Germany. You can bet the drumbeat for tighter monetary policyin place of the all-out massive quantitative easing that we are currently seeingis going to grow louder in Germany and most of the other northern countries. That is exactly the opposite of what Italy and the southern countries need.Big changes are coming for the EurozoneLast week I saw a Spectator article that was not encouraging. I cant say the following any better than the writer, James Forsythe, did, so I will just quote him.After the tumult of 2016, Europe could do with a year of calm. It wont get one. Elections are to be held in four of the six founder members of the European project, and populist Eurosceptic forces are on the march in each one. There will be at least one regime change: Franois Hollande has accepted that he is too unpopular to run again as French president, and it will be a surprise if he is the only European leader to go. Others might cling on but find their grip on power weakened by populist success.The spectre of the financial crash still haunts European politics. Money was printed and banks were saved, but the recovery was marked by a great stagnation in living standards, which has led to alienation, dismay and anger. Donald Trump would not have been able to win the Republican nomination, let alone the presidency, without that rageand the conditions that created Trumps victory are, if anything, even stronger in Europe.European voters who looked to the state for protection after the crash soon discovered the helplessness of governments which had ceded control over vast swathes of economic policy to the EU. The second great shock, the wave of global immigration, is also a thornier subject in the EU because nearly all of its members surrendered control over their borders when they signed the Schengen agreement. Those unhappy at this situation often have only new, populist parties to turn to. So most European elections come down to a battle between insurgents and defenders of the existing order.As James Forsythe says, the conditions that won Donald Trump the presidency exist in Europe as well and are possibly even stronger there. I think well see proof when France, the Netherlands, and Germany hold national elections this year. It is likely that the Italians will also have to hold snap elections because of the banking crisis, and it is not entirely clear that a majority would support a referendum on remaining in the euro.These parties may not have the solutions, but the incumbents definitely dont have them. Given a choice between unlikely and impossible, you have to go with unlikely.Europes problems will become the worlds problemsI expect 2017 to bring many changes to Europe, but Im not convinced it will be the end just yet. Delay and distract has worked well for the pro-EU, pro-euro forces ever since the sovereign debt crisis hit in 2010.At some point, their determination may not matter, but I suspect they can keep doggedly kicking the can down the road until 2018 or later. It is just not clear when they will run out of road.When they do, the result will likely be a very severe recession in Europe, which will embroil the world and could push the US into recession if it happens too quickly.Perhaps, if we muster the reforms we need here in the US and actually get some sustainable growth going, then a fragmenting Europe might just knock that growth back to the sub-2% or even sub-1% range. But if China, too, loses the narrative in 2017, then all bets are off.Grab This Free Report to See What Lies Ahead in 2017Now, for a limited time,you can download thisfree report from Mauldin Economicsdetailing the rocky roads that lie ahead for three globally important countries in 2017and how the economic fallout from their coming crises could affect you.Top 3 Economic Surprises for 2017is required reading for investors and concerned citizens alike.Get your free copy now.SEE ALSO:Italy will be the next big problem in EuropeJoin the conversation about this storyNOW WATCH: 6 'healthy' eating habits you are better off giving up
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