If I had been elected a first time EU parliamentarian

If I was a newly elected first time European Union parliamentarian, the following is what I would ask in order to leave a clean historical record of my presence there:

Fellow parliamentarians: I have heard rumors that even though all the Eurozone sovereigns take on debt denominated in a currency that de facto is not their own domestic printable one; their debts, for the purpose of the risk weighted bank capital requirements, have been assigned a 0% risk weight by European authorities. Is this true or not?

If true does that 0% risk weight, when compared to a 100% risk weight of us European citizens not translate into a subsidy of the Eurozone sovereigns’ bank borrowings or in fact of all Europe's sovereigns?

If so does that not distort the allocation of bank credit in the sense that the sovereigns might get too much credit and the citizens, like European entrepreneurs, get too little? And if so would that not signify some regulators, behind our backs, have imposed an unabridged statism on our European Union?

And if so, does that not mean that some Eurozone sovereign could run up so much debt they would be seriously tempted to abandon the euro and thereby perhaps endanger our European Union?

Finally, was Greece awarded such a 0% risk weight? If so was this monumental fault by EU authorities taken in consideration when restructuring its debts? And if not, does that not show a basic lack of solidarity with a EU member?

Who should answer these questions? The European Commission?

Oops... it seems that it was the European Parliament through a "Council on prudential requirements for credit institutions and investment firms" that concocted the  idea.

PS. In March 2015 the European Systemic Risk Board (ESRB) published a report on the regulatory treatment of sovereign exposures. In the foreword we read:

"The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. 

The report recognises the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. 

I trust that the report will help to foster a discussion which, in my view, is long overdue. Mario Draghi, ESRB Chair"

So Mario Draghi, as president of the European Central Bank since 2011, what have you done about it, or is it your intention to leave that very hot potato to your successor?

PS. In that ESRB report there are references to "domestic" currency but not to the fact that the euro is not really a domestic currency of any of the eurozone sovereigns. 

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)

Three tweets on the Greek Tragedy

What if Alexis Tsipras and Yanis Varoufakis, while negotiating the debt of Greece with the Troika of the European Commission, the European Central Bank and the IMF, had brought up EU’s “Sovereign Debt Privileges”, and then argued: 

Though our debt is in a currency that de facto is not a domestic printable one, you assigned Greece 0% risk weight. That meant European banks could lend to us against zero capital. You expected our governments to resist the temptations of too easy credit 

http://blogs.reuters.com/hugo-dixon/2013/10/07/bundesbank-right-to-focus-on-doom-loop/

And now you want our children and grandchildren to pay for all the need of bailing out your banks? Have you no shame? 

Shall we take you to court? Shall we inform your constituency about your insane 0% risk weighting of Greece? Or shall we renegotiate?

https://teawithft.blogspot.com/2018/09/in-case-of-greece-eu-violated.html

Burning the bridges in Europe

In just a few weeks, on the 1st of January 1999, eleven European countries will forsake the right to issue their own currency and accept the circulation within their boundaries of a common currency, the Euro. 

Monetary policy related to the Euro will be set by a European Central Bank. One fact that struck me as curious is that in all the abundant legislation that regulates this process, there is no mention whatsoever of how to manage the withdrawal or future regret of any of the union’s members.

The absence of alternatives in this case evidently represents a burning of the bridges, but this may be necessary to achieve credibility. There is no turning back and there is no doubt that this is a truly historical moment. As participants in a globalized world in which Europe has an important role, we must naturally wish all members luck, no matter what worries we might secretly harbor.

Until 1971, all money used throughout the history of humanity was backed in one way or another by something physical to which a real value was attributed. Sometimes the backing was direct, pearls for example, while in other cases it was indirect such as the right to exchange bills for a certain quantity of gold.

This physical backing in itself did not necessarily mean it consisted of something of fixed value. The value of a pearl, for example, is in itself subjective. 

The promise to exchange bills for gold did not guarantee anything either, since this promise could easily be voided by fraud. Whatever the backing was, however, it did at least offer the holder of the money the illusion that it was supported by something concrete.

In 1971, the United States formally abandoned the gold standard and the direct backing, however imaginary, disappeared. Since the Dollar is a legal currency, it could always be used to repay Dollar denominated debt. 

Today, however, in spite of the fact that the Dollars may have lost some of their purchasing power, a holder of excess Dollars can only hope that the Government of the United States will exchange his old bills for new ones of the same tenor.

This apparently precarious situation must be the raison d’etre of the motto printed clearly on the bills which states “In God We Trust”.

Since 1971, the real value of the Dollar as an element of exchange, has lost some of its value due to inflation. 

Today, we would need many more Dollars to buy the same houses, cars, movie tickets and gold than we would have needed in 1971. In spite of the above, with few exceptions such as the end of the ‘70s during which inflation increased dramatically, few would dare qualify the United States’ elimination of the gold standard as a failure.

The world’s economies have managed to increase international commerce drastically and with it, sustain a healthy growth rate. Many analysts would explain this phenomenon by saying that the discipline exacted by the gold standard represented a brake on international commerce. The growth rate registered in commerce after 1971 was the result of the release of this brake. 

Other more critical analysts sustain the thesis that, due to the fact that we have abandoned the discipline required by the gold standard, the world has accumulated gigantic accounts payable, which we may be coming due very soon.

I personally swing back and forth between amazement of the fact that the world has accepted such a fragile system and satisfaction that it actually has done so.

The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. 

The Dollar is backed by a solidly unified political entity, i.e. the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. 

Exchange rates, while not perfect, are escape valves. By eliminating this valve, European [Eurozone] nations must make their economic adjustments in real terms. 

This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.

What worries me most is the timing. The world is facing the possibility of a global recession. This will require very flexible economic and monetary policies. 

The fact that the search for initial credibility for the Euro is based on trying to assure markets around the world that the new currency will be guided by a philosophy closer to that of Bonn (soon to be Berlin) than that of Rome, probably goes against the best interests of the world.

Published in Daily Journal, Caracas, November 19, 1998

20 years later: Let’s face it. Americans dream they are American. Few if no Europeans, dream they are Europeans.

PS. A new English Language Empire?

PS. What I did not know when I wrote this article was that EU authorities (EC), for the purpose of their (crazy) risk weighted capital requirements for banks decided, in a “good-will” gesture, to assign a sovereign debt privilege of a 0% risk weight to all European sovereigns like Greece. That of course, by removing market credit constraints, would make the Euro challenges so much more explosive especially considering that the Euro is de facto not a domestic (printable) currency of any Eurozone nation. Shamefully EU authorities responsible for that have not acknowledge their mistake, and made Greece have to walk the plank for it.

IT IS NOW A TICKING BOMB!