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. 

Was Sofia Goggia singing her national anthem with such fervor just being another Italian populist? NO!

I refer here to Nobel Laureate Michael Spence’s “The Italian Economy’s Moment of Truth” Project Syndicate July 7.

Spence writes:“Italian banks currently holding considerable amounts of government debt would suffer substantial balance-sheet damage.” 

Why is that? Is it perhaps because bank regulators allow banks to hold Italian debt against the least capital, meaning they can leverage it the most, meaning they can earn the highest expected risk adjusted returns on equity on it? Yes!

Then Spence writes: “Moreover, Italy needs to develop the entrepreneurial ecosystems that underpin dynamism and innovation. As matters stand, the financial sector is too closed, and it provides too little funding and support for new ventures.” 

Why is that? Could it be because regulators require banks to for instance hold more capital against loans to entreprenuers than against residential mortgages? Yes!

Spence writes: “Italy has enormous economic potential. But the challenge lies in unlocking it, which will require several things to happen.”

One reason for that is that the option to restore competitiveness by means of devaluing its currency was closed when the Euro was adopted, and the EU authorities have been too busy with other minutia over the last 20 years so as to concentrate on how to solve the immense challenge with creating a union by pushing a common currency instead of a common currency resulting from a union.

The best of the Winter Olympics 2018 for me was seeing Sofia Goggia singing her Italian national anthem with such enthusiasm. But there was not one bit of Europe present in her voice… and that is an indication Europe is not going in a European direction. Was she a populist?

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

E.g. How many Europeans know how to sing the EU anthem “Joy to the World”?

PS. The euro has done nothing to solve the challenges posed by the use of the euro, and in many ways, like what it did to Greece, it has behaved more as a Banana Union.

PS. “We will safeguard your bank system with our risk weighted capital requirements for banks”, as if they the regulators in the Basel Committee really knew what those risks were, is a hubris fed dangerous technocratic besserwisser populism of the worst kind. 

PS. Just in case you are curious, the worst for me at the WO-2018 was to suffer with Egvenia Medvedeva when not winning gold.

Together or mixed up

Together or mixed up

If you look at Venezuela and Colombia on a map, you will know that in the long run, it will be impossible to avoid the multiple opportunities that their integration would offer, so it is clear that either the two countries unite, or one of the two grabs the other, or Someone will bring them together... in a macho way, under the umbrella of their own geopolitical interests. What do you prefer?

Contemplate how European countries, with all their differences, linguistic ones being the least, today, less than sixty years after the war, subordinate themselves to a political-economic community and are drafting a common constitution, with the humble purpose of trying to maintain its level of development, serves to highlight the smallness of our political leaders in Colombia and Venezuela, yesterday and today

Both countries are doing badly, very badly indeed, but instead of seeking to capitalize on the possibilities of a true union of markets, which would allow us to recover that lost direction that has never been found, our leaders, if they can be classified as such, are rather dedicated to feed and fuel tensions, hiding their own inadequacies.

It is not easy to design a plan in today's world that simultaneously feeds a people hungry for dreams and inspires the credibility that the markets demand. Committing ourselves fully to integration and beginning it by establishing a consistent monetary, exchange and trade policy must be one of the main components of any plan capable of offering us a better future.

How do we do it? I wish I knew, but I confess that I have no idea... except to know that it requires leadership capable of subordinating the little things of today to the greatness of tomorrow, which would seem very difficult to achieve in a world where the growing demands of our peoples for immediate gratification, are surpassed by those of the majority of our politicians.

However, and because every crisis means an opportunity...if we think about the size of the crisis that our countries are experiencing, who knows if suddenly, when so many material needs have been combined with so many spiritual needs, the conditions will finally be met. so that we can wake up from our lethargy and fulfill that historic mandate of achieving a Great Union.

Of course, there is always the fourth alternative, the worst between brothers, that a new bipolar world emerges with a great Colombian-Venezuelan wall as a border.

https://perkurowski.blogspot.com/2001/01/my-colombia-plan.html

Translated by Google.

No, thanks

 No, thanks

The following paragraph is extracted verbatim from the UK Energy Report 1999, published by the Department of Trade and Industry of England.

“The retail price of products is largely determined by taxes, especially for fuel. The attached figures ... illustrate the increasing proportion of the price of gasoline attributable to taxes. The incidence of taxes, ...explains around 85 percent of the final price of unleaded gasoline..." Prices are expected to continue growing, given the commitment of the English Government to increase taxes on petroleum by an average of 6 % annual, above inflation.

The report's figures indicate that the price of petrol before tax fell from 15 to 10 pence per liter between 1980 and 1999, a decrease of 33%. However, for the same period in England, the consumer price went from 26 to 68 pence per liter, increasing 162%. The explanation for this phenomenon is found in the various taxes on gasoline, which rose from 11 pence in 1980 to 58 pence per liter in 1999, an increase of 427%.

Taxes, applied in a discriminatory manner to oil, which favor coal, for example, affect both the volume and the sales price of our main export product and therefore directly harm our country. All of Europe applies taxes of the same order and the other consuming economies, except the United States, are evolving in the same direction.

It was only a few months ago that the magnitude of these taxes was understood and the consequences, at least in Europe, were serious protests by consumers. It will be necessary to observe whether in 2001, countries like England and Germany, even when stripped, continue with their pre-programmed increases.

The relative silence of Venezuela and other oil-producing countries, the truly aggrieved ones, is surprising. Sometimes I wonder if such passivity has its origin in the fact that in this globalized world, everyone is still dying for the possibility that one day The Queen will invite them to have tea in her palace.

In November 2000, the president of the European Energy Foundation of the European Union, with great cynicism, announced that in the dialogue between oil consumers and producers, everything could be discussed, except taxes, since these did not significantly affect consumption.

In December 2000, the European Union announced a donation of 55 million euros for the reconstruction of Vargas, to be disbursed over two years.

In a world that preaches free trade, oil taxes are hypocrisy. I, being a Venezuelan of European descent, may react in particular, but I am convinced that we have to place our protest in its correct dimension. In this sense, and even if I had never rejected the help offered by the United States during the tragedy in Vargas, today I would not hesitate to respond to Europe: No thanks, we do not want your donation, that amount is equivalent to what Venezuela would obtain each week if You, on the basis of false environmentalism and real fiscal voracity, do not apply taxes that discriminate against oil. We will not help calm their institutional conscience by accepting some insolent barter with begging mirrors.

(Translated by Google from an Op-Ed published in Venezuela February 1, 2001)

The Oil Curse

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?

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, even though none of these could print Euros, 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!