A brief comment on Joseph E. Stiglitz “The EURO: How a common currency threatens the future of Europe”

Professor Stiglitz correctly describes many of the challenges the Euro poses, most of which were known from get-go twenty years ago, like the problem derived from having fixed exchange rates within the Eurozone.

In the introduction to the paperback edition, Stiglitz also briefly brings forward something that should have been understood but seems to have been much ignored. That is that although the Euro is for most purposes the domestic currency in the Eurozone, it is de facto not a truly domestic currency for any of its sovereigns, since none of these have the right to individually print the Euros it wants or needs. Without that right, the Eurozone’s sovereigns’ debts are all, de facto, denominated in a quasi-foreign currency.

But what the book does not mention, is what came afterwards, I do not know exactly where and when; something that here and there is referred to, in hush voices, as Sovereign Debt Privileges. These translate into that the EU authorities (European Commission?), for the purpose of the risk weighted capital requirements for banks, assigned all Eurozone nations an insane 0% risk weight. 

That distortion in favor of Eurozone’s sovereign’s accesses to bank credit has impeded the markets from sending the correct market signals with respect to the interest rates for each sovereign.

One of the consequences of this has been the tragedy of Greece. Especially since Greece was then forced up to pay up basically on its own for this EU mistake, so as to bail out German, French and other Eurozone banks. What a Banana Union!

As for Professors Stiglitz opinions on Brexit I might resume those I my own words as “If there's a Remain there might not be a EU in which to remain”, something that would be very sad as EU was, and still can be, a very beautiful dream.

But let me be clear. I do not hold the EU authorities as solely responsible for the consequences of their 0% risk weighing of the Eurozone Sovereigns. Already in 2011, in a post titled “Who did the Eurozone in?” I argued that the extraordinary low risk weights that the Basel Committee assigned to sovereign debt when compared to what it assigned to the private sectors would end in tears. (And that goes not only for the Eurozone)

Here’s the moment it struck me that if Brexit falls apart, there might not be a EU for Britain to remain in.

It’s now twenty years since the Euro was introduced, more in order to strengthen a union than the result of a union. As I wrote in an Op-Ed at that time, it brought on important challenges to its 19 sovereigns. First it meant giving up the escape valve of being able to adjust their currency to their individual economic needs and realities, and second, much less noticed, also by me, was that they would hence be taking on debts in a currency that de facto was not denominated in their own domestic (printable) currency.

To face those challenges required the Eurozone to extend much more the Euro mutuality to other areas, like to monetary and fiscal policies. In that respect there’s no doubt that way to little has been done.

For more than a decade I thought the Eurozone applied Basel Committee’s Basel II standardized credit rating dependent risk weights in order to set the capital requirements for banks, when lending to sovereigns. I never approved of that because I considered those risk weight way too statist, tilting bank-lending way too much in favor of the sovereign and against the citizen... and that should do the Eurozone in. 

But then, by mid 2017, I found out that it was all so much worse. EU authorities, most probably the European Commission, I really do not know who and when, assigned all Eurozone sovereigns a 0% risk weight, even though none of these can print euros on their own.

I could not believe it. That meant that European banks could hold sovereign debt, of for instance Greece, against no capital at all. How could something crazy like that happen? That basically doomed the Euro. What would have happened with USA if it had done the same thing with its 50 states?

How on earth can it now get out of that corner it has been painted into, especially when Europeans sing their national anthems with so much more emotion than EU’s anthem, Beethoven’s Schiller’s “Ode to Joy”

And that’s the moment it struck me that if Brexit falls apart, there might not be a EU for Britain to remain in.

My November 1998 Op-Ed "Burning the bridges in Europe"

PS. When Greece fell into the trap then EU authorities had it sign a Versailles type treaty.

A New English Language Empire

I have often harbored reservations about the possibility of success of the European Union. In particular my worry is about its new currency, the euro, the bases of which I believe are rather weak. I recently heard that there is still much debate going on which, even when new to me, leads me to rethink many of today’s geopolitical aspects.

I refer to the thesis that the United Kingdom is finding it extremely difficult to get used to the idea that it must forgo much of its autonomy in favor of an entity formed by other nations which are geographically close, but still very mystifying, and therefore could possibly abandon the idea altogether, forging instead an alliance with the English speaking world. Among the sponsors of this line of thought, I find the Canadian newspaper owner Conrad Black and the well renowned historian Paul Johnson.

Having observed how much time and effort the UK and the United States spend coordinating their foreign policy and considering how tempting it must be to unite cultures of the same origin that speak the same language and share the same legal system into one global superpower, it should not really be surprising if we were all of a sudden presented with the creation of an English Language Union, or ELU. Considering the recent impact of Shakespeare in Hollywood it might be a lot closer than we think.

The possible implications of a NAFTA expanded to include the UK plus perhaps even other nations such as Australia and New Zealand (both disillusioned by the Asian crisis) lead me to reflect on other issues in addition to the importance of the English language. 

The first issue that occurs to me is that any pact of this sort would effectively wipe out any aspiration Europe may nurture of going head to head with the United States unless it undertakes internal expansion (Russia or its former satellites, maybe?).

Another important thought is the fact that in a globalized and computerized world, geographical proximity seems to be losing its importance. The truth is that once you have incurred the cost of loading merchandise on an airplane or ship, the marginal cost of transporting it a few thousand miles further is not really that great. This could be of importance to Venezuela, especially when it owns so much oil.

The Andean Pact, is basically a commercial agreement with Colombia. This makes a lot of sense if we are trying to create bigger markets with their corresponding economies of scale for our respective industrialists. 

It does not make much sense as far as real complementary economics are concerned.

It is possible that Venezuela, while not abandoning its policy of creating larger markets, should be intensifying its efforts of negotiating commercial agreements with countries very different from itself, in which we can maintain our competitive advantages.

While oil prices remain low, our currency will be sufficiently weak so as to allow industries heavily dependent on labor, such as the textile confection sector to compete with Colombia. Evidently, if oil prices were to spike upwards, the bolívar would become stronger and would make survival of industries such as these difficult, obligating the country to impose protective duties.

If, however, our agreements would be based more on real complementary issues and economics, then it would be possible to create sustainable results. A simple theoretical example would be a negotiation of an commercial agreement with one of the Nordic states, with a wintry climate, allowing them preferential access to our market, with the establishment of the beaches of Margarita as the preferred winter tourist attraction for its citizens. Chile, for one, has made a lot of this, in for instance promoting fruit exports, taking advantage of the fact that their seasons are opposite to those of the Northern Hemisphere.

There is no doubt that we are in a fluid and rapidly changing environment in which it is of extreme importance to be alert to the possibilities that are presented to us. Personally, I feel that Venezuela should not hurry into commercial agreements, simply because it is the thing to do, the flavor of the month. What’s more, with the sole exception of Colombia, with which we share a permeable border which in turn makes the negotiation of agreements a must, I believe Venezuela has not signed one single agreement in which it comes out ahead in practical terms as a country.

Published in The Daily Journal, Caracas, April 1999

PS. Oops! Does Brexit now reignite this alternative? How much should the English language proprietors now charge the remainder EU for the use of it… so as to avoid a war between Germans, French and Spaniards on which should now de facto be its official language? Or will EU go for Esperanto?