June 02, 2018

To salvage the European Union, its authorities must be held responsible for the travails of Italy, Greece and other.

Sir, with respect to what’s happening in Italy you write: “The guardians of the single currency failed to mend the roof while the sun was shining… Even if disaster has been averted on this occasion, the economic and political fragility of the eurozone remain all too clear” “Italy sets a stress test for the eurozone, again” June 2.

True. From the very start, soon 20 years ago, it must have been clear for all the proponents of the Euro that adopting it, meant for all countries using it giving up the possibility of adapt to different economic circumstances through foreign exchange rates adjustments.

And a Germany would benefit with a too weak for it Euro, and others, like Italy and Greece would suffer a too strong for them Euro.

What have the Eurozone authorities done to meet that challenge? Way too little! They busied themselves with all other type of lower priority issues and outright minutia. Worse yet, they also stupidly silenced the full disequilibrium signals that the interest rates on the Euro members’ public debt level could send the markets by assigning to all a 0% risk weight. Something that made the sun seem shine brighter than what it really did!

Fabio Panetta, the Deputy Governor of the Bank of Italy in a speech in London in February 2018, with respect to the possibility of raising the capital requirements on sovereign debt had the temerity to say: “The problem of high public debt should be addressed by Governments directly, with determination. It should not be improperly tackled with prudential regulation.”

If I were an Italian or a Greek, given a chance I would have told (shouted) him: 

“With your 0% risk weighing you regulators imprudently created temptations for our politicians to be able to take on much more public debt at much lower rates than would otherwise have been the case, and now you argue they should have been able to resist such temptations? Just the same way you argue that banks should have resisted the temptations to leverage over 60 times with assets that carried an AAA rating? Have you and your colleagues no shame?” 

Sir, while regulators keep on giving banks more incentives to finance the “safer” present consumption than the future “riskier” production, the chances for Europe (and America) to get out of its problems lie, at least in the case of Italy, as so many times before, in the strength of its economia sommerza.