Well-invested small savings surpluses are better than big ones thrown away at fluffy sovereign spending projects.

Sir, Martin Wolf correctly points out “Without the shelter of the eurozone, the Deutschmark would have greatly appreciated in a low-inflation world” “How Germany avoided the fate of Japan” October 30.

Indeed it would have appreciated, but that does not necessarily mean that it would have been bad for Germany… or for the rest in the eurozone.

Wolf holds that Germans need to realize “that the euro is already working to their benefit, by stabilising their economy, despite its huge savings surpluses.”

Q. Without the euro would those huge savings surpluses exist? A. No!

Q. Without the euro could not whatever smaller saving surpluses have resulted much better invested? A. Yes!

Wolf points out: “Even at ultra-low interest rates, domestic private investment in Germany fell far short of private savings. [And] since the government too ran fiscal surpluses, in Germany, capital outflows absorbed all the private surplus [much through] German financial institutions, with their huge foreign assets”

And that’s their problem. Because of risk weighted bank capital requirements that favors financing the safer present over the riskier future, plus that insane debt privilege of a 0% risk weight assigned to all Eurozone’s sovereign debts, even though none of these can print euros, most of those German saving surpluses ended up financing mediocre eurozone governments… and building up such unsustainable huge debt exposures, that it will come back to bite all, the euro, perhaps the EU, and of course Germans too.

The day when Germans citizens realize the real meaning of that their banks need to hold around 8% of capital when lending to German entrepreneurs, but need zero capital lending to eurozone sovereigns, and that they will not be able to collect on those loans, those German citizens are going to be very wütend.

.And Sir, again, for the umpteenth time, Wolf returns to his: “The chance to borrow at today’s ultra-low long-term interest rates is a blessing, not a curse.” 

Wolf just refuses to accept that today’s ultra-low long-term interest rates, is an unsustainable artificial concoction that mainly benefits public debts, in other words, pure unabridged statism, based dangerously on that government bureaucrats know better what to do with credit, for which repayment they are not personally responsible for, than for instance the private entrepreneurs. When it comes to bank regulations a Communist Wall was constructed in 1988, one year before the Berlin Wall fell.

PS. The Euro had one characteristic that differentiated it from US$. That made me less optimistic as to its chances of success. The US$ is backed by a solidly unified political entity, USA. The Euro was aimed at creating unity and cohesion, not the result of it.

@PerKurowski

How do you square negative rates with a 0% risk weight?

Paul Horne writes, “It must be a fairly dire outlook to persuade investors to pay eurozone governments to hold their capital even as there must be doubt about Bunds and French OATs being the “safest” of investments at today’s prices.” “Investors need to be aware of the other bond bubble” June 21.

Indeed, but given the redenomination risk that would exist if the still ticking 0% Risk-Weight Sovereign Privilege assigned to Eurozone’s Sovereign bomb explodes, I guess investors might prefer being paid with Deutsche Marks than with Liras or Drachmas.

@PerKurowski

If Germany’s euro debt gets to be redenominated in Deutsche Marks, what would happen to its commercial surplus?

Sir, Kate Allen writes: “German bonds, or Bunds… are the eurozone’s safe asset… the spread against equivalent Italian bond yields to about 2.9 per cent.” “Tail Risk” February 19.

So if Bunds is the Eurozone’s safe asset, how come EU authorities assign it a risk weight that is just the same as all other Eurozone sovereigns’ debts, namely 0%? And this even when they all are indebted in a currency that is not really their own domestic (printable) one.

That 0% risk weight translates into that European banks do not have to hold any capital against debts of the Eurozone sovereigns… a clear subsidy... especially to those sovereigns most remote from earning that 0%.

So, had that not been the spreads of many eurozone sovereigns against Bunds would have been much larger, and in such case many of those sovereigns, like Greece, like Italy, like Spain, like Portugal would have had to borrow less, and would therefore have had to reduce their commercial deficits, reducing by that Germany’s commercial surplus.

Allen opines: “Investors need to put their money somewhere and [if there are not enough Bunds they are forced into substitutes which then rapidly become overloaded and suffer price bubbles.”

Indeed but when we consider that much of that investment money was supplied by ECB buying European sovereign debt, including Bunds, perhaps we should start by looking there before we might add fuel to a dangerous fire.

PS. Brexit,  the 0% risk weight and the EU

@PerKurowski

What would happen to German Bunds, denominated in Euros, if Italy refuses to walk the plank like Greece?

Sir, I am not sure I follow Kate Allen’s discussion about the future of German Bunds. It is almost as she was discussing these as denominated in Deutsche Mark. The fact is these are in Euros, the same currency other weaker eurozone sovereign-debtors have their bonds denominated in. For instance, what would happen if Italy refuses to walk the plank like Greece? “German bond buyers bank on smooth withdrawal from QE”, November 6.

The European Union has clearly not dedicated itself wholeheartedly to solve the fundamental challenges posed by the adoption of the Euro by so many of its members, twenty years ago. For instance the European Commission has wasted its time on so many issues of minuscule importance that were really none of its business. As a result that Euro, which was created to unite Europe, might now disunite it. 

So what would happen if the Euro breaks in pieces? I have no idea but, in the case of Germany, if asked, I assume holders of German Bunds would probably accept to convert these into German Neo-DM Bunds. But of course that would also put an end to the eurozone “weaklings” subsidizing Germany’s competitiveness… like what if 1US$ = 0.75 Neo-DM? It would be a whole new ball game for everyone, Germany included!

Sir, as I recently wrote to you, for all those who want a peaceful European Union to thrive, which of course should include both Britain’s Brexiters and Remainers, the acts commemorating the end of WWI, provides an opportunity for important reflections.

In this respect the European Commission, the European Central Bank, the European Parliament, all of them, when imposing armistice conditions on capitulating eurozone sovereign debtors, should do well remembering the Versailles Treaty.

PS. Greece walked the plank

@PerKurowski

The euro did not derive from a union but was used to build a union, and that still poses great-unresolved challenges.

Sir, I refer to Philip Stephens’“Trump, Italy and the threat to Germany” June 8.

Stephens writes: “Germany has been a “taker” — importing stability from neighbors and allies.” Indeed, but Germany has also imported the economic weaknesses from neighbors benefitting from a euro lower than what it would be if responding solely to Germany.

Yes, “The euro did not cause Italy’s economic ills, but it does close off the old escape route of devaluation”, except of course for those economies that, on the margin are the strongest, e.g. Germany.

Knowing they were benefitting unduly from the euro was perhaps the reason why the ordinarily much more disciplined Bundesbank Germans supported that insane notion of assigning, for the purpose of the capital requirements for banks, a risk weight of 0% to euro partners like Greece. For a while growing public indebtedness hid the costs of a stronger than suited for the weaker economies euro, but that lifeline has now clearly run out of steam.

What should the eurozone do know in order to survive? The answer must be finding a sustainable solution to the immense challenge that existed from the very start, when elites decided to build a union based on the euro instead of having a euro derived from a union.

Americans dream as American. How many Europeans dream as European?

The single currency is still a great gamble, but Europe don’t blame it for causing the current crisis.

Sir, in November 1998, in an Op-Ed titled “Burning the bridges in Europe”, I expressed serious reservations about the single currency. Among it, because “The Euro… seems to be aimed at creating unity and cohesion. It is not the result of these.”

But I do get upset when I read a letter like that of Sir James Pickthorn “Admit it, FT – the single currency has been the most awful mistake.”

Basel II regulations of June 2004, because of how Greece was rated A+ to A- between November 2004 and January 2009, would have allowed banks to lend to Greece leveraging their equity more than 60 to 1. The capital (equity) requirement was a meager 1.6 percent (the basic 8% times a 20% risk-weight).

And so of course the Greek government was doomed to take on too much public debt. What Greek politician/bureaucrat would have been able to resists the offers of loans? What couple of banks at least would not have resisted the temptation to offer these to Greece, in order to earn fabulous expected risk adjusted returns on their equity?

What would then have happened if there had been no Euro, and Greece had borrowed Dollars, Pounds or Deutsche Marks? The ensuing haircuts would be direct, or indirect by means of Drachma devaluations. Yes the crisis resolutions could perhaps been less traumatic, but the crisis would still have happened.

Get any European country to use its own currency, but keep current distortions of bank credit in place, and they are still all doomed! If someone needs to apologize to Europe, that is the Basel Committee for Banking Supervision. If something will really bring Europe to its knees, it is not the Euro but the risk-aversion implicit in current bank regulations. 

@PerKurowski

Is Greece becoming Germany´s fart-payer?

Sir Wolfgang Münchau writes “Greece can expect no gifts from Brussels” November 30, and which makes us reflect on what it would have looked like if for instance Greece still had the Drachma and Germany the Deutsche Mark. 

In such a case Germany would have had to be doing the Chinese styled currency weakening on its own instead of having Greece and others euro-black-sheep average the Euro down for them. And clearly Greece would be able to devalue and use that politically more friendly approach of being able to inflate yourself out of the problems, instead of having to impose Germanic discipline on their citizens. Come on, does not Greece deserve a little gift?

Rumours have it that in old Venezuela the fine ladies of society were always accompanied by a small coloured boy whom they could hit on his head whenever a lady farted. These boys were known as fart-payers (paga-peo). Could it be that Greece is becoming Germany´s fart payer?