In the Eurozone there are many ticking debt bombs.

Sir, I refer to “Europe’s plan: com­plete its single mar­ket” by Barbara Moens and Alice Hancock, FT Big Read June 24, 2025. It states that “Three decades after it was launched, hun­dreds of bar­ri­ers still per­sist within the EU. 

November 1998, few weeks before that launch, in an Op-ed titled “Burning the bridges in Europe”, I wrote: “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.”

Years later, during the 2018 Winter Olympics, seeing/hearing Sofia Goggia singing her Italian national anthem with such enthusiasm, that opinion got reinforced. Frankly, now 2025, how many Europeans know and sing EU’s anthem Joy to the World as theirs?

In the referenced Op-Ed I also wrote: “Exchange rates, while not perfect, are escape valves. By eliminating this valve, European nations must make their economic adjustments in real terms. This makes these adjustments much more explosive.”

And that was before I knew that, amazingly, even if none of the Eurozone sovereigns can print Euros on their own, EU’s bank regulators, for Basel’s risk weighted bank capital/equity requirements, decreed a 0 percent risk weight. What ticking debt-bombs! Imagine if US had done so with the debt of its 50 states.

Sir, could Brexit have happened if Britain had also burned its bridges by adopting the Euro? 

Sir, Bulgaria has no idea into what it wants to get into.

Sir, with bank regulations based on the Eurocrats knowing better what to do with credit, for which repayment they’re not personally responsible for, than EU’s private sectors, what chance does Europe have?

 

About Italy, there are serious questions that FT, and others, should not silence.

Sir, I refer to “Draghi plots €221bn rebuilding of Italy’s recession ravaged economy” Miles Johnson and Sam Fleming, and to “Europe’s future hinges on Italy’s recovery fund reforms”, Andrea Lorenzo Capusella, FT April 22, and to so many other articles that touch upon the issue of Italy’s future, in order to ask some direct questions.

Do you think Italy’s chances of a bright future lies more in the hands of Italy’s government and its bureaucrats, than in hands of e.g., Italian small businesses and entrepreneurs?

I ask this because, with current risk weighted bank capital requirements, regulators, like Mario Draghi a former chairman of the Financial Stability Board, arguably arguing Italy’s government represents less credit risk, do de facto also state it is more worthy of credit. I firmly reject such a notion.

Yes, Italy clearly shows a stagnant productivity, but could that be improved by in any way increasing its government revenues?

Italy, before Covid-19, showed figures around 150% of public debt to GDP and government spending of close to 50% of GDP. I am among the last to condone tax evasion… but if Italian had paid all their taxes… would its government represent a lower share of GDP spending, and do you believe its debt to GDP would be lower?

One final question: Sir, given how Italy is governed, excluding from it any illegal activities such as drug trafficking, where do you think it would be without its shadow eeconomy, its economia sommersa? A lot better? Hmm!

PS. As you know (but seemingly turn a blind eye to), Italy’s debt, even though it cannot print euros on its own, has, independent of credit ratings, been assigned by EU regulators, a 0% risk weight.

By not asking all the questions that need to be asked, journalists also fail society.

Sir, Henry Manisty writes “financial journalism plays a vital role in upholding the integrity of financial markets”, “EU regulators have form on obstructing journalists” November 9.

Indeed, but in many respects, financial journalists have often failed society by not doing that. For instance, here are just three examples of questions that should have been posed directly to the regulators, long ago.

We know that those excessive bank exposures that can be dangerous to banks and bank systems are always created with assets perceived as safe, never ever with assets perceived as risky. Therefore, can you please explain your risk weighted bank capital requirements based on that what’s perceived as risky is more dangerous than what’s perceived as safe?

Before risk weighted bank capital requirements credit was allocated on the basis of risk adjusted interest net margins and a view on the portfolio. After that it is allocated based on risk adjusted returns on equity; which obviously those that banks can leverage less with, e.g. “risky” SMEs and entrepreneurs. Explain how this does not distort the allocation of bank credit?

Even though none of Eurozone sovereigns can print euros on their own, for your risk weighted bank capital requirements you decreed a zero-risk weight for all of their debts. What do you think would have happened in the USA if it had done the same with its 50 states?

Sir, paraphrasing Upton Sinclair one could say that “It's difficult to get a journalist to ask something, when his salary, or being invited to Davos, depends on his not asking it.”

PS. My 2019 letter to the Financial Stability Board (FSB)

If US’s 50 states had been assigned a 0% risk weight, as was done in the Eurozone, where would America and the US dollar be?

Sir, Gyorgy Matolcsy opines: “Two decades after the euro’s launch, most of the necessary pillars of a successful global currency — a common state, a budget covering at least 15-20 per cent of the Eurozone’s total gross domestic product, a eurozone finance minister and a ministry to go with the post — are still missing.”, “It is time to recognise that the euro was a mistake”, November 4.

Bad as that is, it’s still much worse. Even if all those “necessary pillars of a successful global currency” were present the euro would still be in serious trouble. This a result of the sovereign debt privilege of the 0% risk weight that for purposes of bank capital requirements was assigned to all Eurozone nations, even though none them can really print euros on their own.

Sir, if all USA’s 50 states had been assigned a similar 0% risk weight, as was done in the Eurozone, where would America and the US$ be?

http://teawithft.blogspot.com/2019/06/the-still-ticking-0-risk-weight.html

@PerKurowski

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

What the Eurozone would need a common budget the most for, is to help rescue many of its members from their huge risky 0% risk weighted sovereign debts.

Sir, Martin Arnold reports that Mario Draghi, “the outgoing ECB boss repeated his call for eurozone governments to create a sizeable common budget that could be used to provide greater economic stability in the 19-member currency zone by supporting monetary policy during a downturn.” “ECB chief Draghi uses swansong to call for unity” October 29.

As I see it the eurozone, unwittingly, already had a sizable non transparent common budget, namely that of, for purposes of risk weighted bank capital requirements, having assigned to all eurozone sovereigns’ debts, a 0% risk-weight, even though none of these can print euros on their own.

Some of these sovereigns used that privilege, plus ECB’s QE purchases of it, to load up huge debts at very low interest rates, so as to spend all that money. Now things are turning hard for many of these. Greece was small and walked the plank, and had to mortgage its future. Italy might not be willing to do so. There is a clear redenomination risk, and it is being priced more and more. 

So when Draghi now says “We need a euro area fiscal capacity of adequate size and design: large enough to stabilize the monetary union” it is clear he is very subtle referring to the dangers of the euro breaking down.

But when Draghi mention that fiscal capacity should be designed as not “to create excessive moral hazard”, then its harder to understand how that moral hazard could be worse than that already present in that idiotic 0% risk weighting.

What is clear is that for a eurozone common budget to serve any real purpose, those privileged 0% risk weights have first to be eliminated.

Just like it is hard to see some states with good credit standing accepting a 0% risk weight of other in much worse conditions, it would be difficult to explain for instance to Germans why their banks need to hold around 8% in capital when lending to German private entrepreneurs, but no capital at all when lending to the Italian or Greek governments.

How to do that? Not easy but my instincts tell me it begins by allowing banks to keep all their current eurozone sovereign debts exposures against zero capital, but require these to put up 8% of capital against any new purchases of it. That would freeze bank purchases, put a pressure on interest rates to go up, and allow the usual buyers of sovereign debt to return to somewhat better conditions.

But, of course, that might all only be pure optimistic illusions, and all eurozone hell could break out. 

@PerKurowski

The dangerous distortions in the allocation of credit that risk weighted bank capital requirements cause, is seemingly something that shall not be discussed.

... not even by those former central bankers who refuse to fade away

Sir, with respects to “the attack on the European Central Bank’s by six former central bankers” you write “Only one thing can match the stature of the complainants and that is the hollowness of their complaint.” “The euro’s guardians face a roar of the dinosaurs” October 7.

In their memo we read: “The negative impact of the ultra-low interest environment extends from the banking system, through insurance companies and pension funds, to the entire financial sector. The re-distribution effects in favour of owners of real assets, create serious social tensions. The young generations consider themselves deprived of the opportunity to provide for their old age through safe interest-bearing investments… and also furthers a ‘zombification’ of the economy”

Of course in the short run low and even negative interest rates benefit those who borrow more than those who save but, hopefully, one always hopes that will be made up in the future, by means of increased productivity and economic growth.

Significantly though the “dinosaurs” left out mentioning the distortions in the allocation of credit produced by the risk weighted bank capital requirements, which benefits especially the borrowings of sovereigns, that which FT does not want to discuss either. 

I ask. Where would the Europe/Eurozone’s interest rates on sovereign be if banks, as it was for around 600 years before 1988’s Basel Accord, needed to hold the same amount of capital against loans to the sovereigns, currently 0%, than against loans to unrated European entrepreneurs, currently 8%? Dare try thinking about that. Ask your own journalists to try to answer that question.

And neither do they discuss the special case of the 0% risk weight assigned to all Eurozone sovereigns’ debts, even though none of these can print euros. Could it be because of a bad conscience?

And with respect to the young generation what it really should be up in arms against, are the much lower capital requirements for banks when financing the safer present than when financing that riskier future on which its good outcome the young really depend on.

@PerKurowski

The still ticking 0% Risk Weight Sovereign Debt Privilege bomb awaits Mario Draghi’s successor at ECB

Sir, Martin Wolf, sort of implying Mario Draghi followed his recommendations, which of course could be true, holds that “Draghi did the right things, above all with his celebrated remark in July 2012 that ‘within our mandate, the ECB is ready to do whatever it takes to preserve the euro’”. “Jens Weidmann casts a shadow over the ECB” June 11.

Did Draghi resolve that crisis for the better, or did he just postpone it for the worse?

That’s is not at all clear. In March 2015 the European Systemic Risk Board (ESRB) published a “Report on the regulatory treatment of sovereign exposures.” Let me quote from its foreword:

“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 recognizes 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 that, in my view, is long overdue.” Signed Mario Draghi, ESRB Chair

The regulatory aspect that report most refers to is, for purposes of risk weighted capital requirements for banks (and insurance companies), the assignment of a 0% risk weight to all Eurozone sovereigns. 

Though the report states that: “Sovereign defaults… have occurred regularly throughout history, including for sovereign debt denominated and funded in domestic currency”, it does not put forward that all these eurozone sovereign debts are denominated in a currency that de facto is not a domestic printable one of any of these sovereigns.

Since Mario Draghi seems to have done little or nothing since then to diffuse this 0% Sovereign Debt Privilege bomb, which if it detonates could bring the euro down, and with it perhaps EU, this is the most important issue at hand. 

So when choosing a candidate to succeed Draghi as president of ECB the question that has to be made is whether that person is capable enough to handle that monstrous challenge. Who is? Jens Weidmann? I have no idea.

Sir, it would be interesting to hear what Martin Wolf would have to say to the new president of ECB about this. What would a “Do what it takes” imply in that case? 

PS. And when Greece was able to contract excessive debt precisely because its 0% risk weight should not the European Union have behaved with much more solidarity, instead of having Greece walk the plank alone?

PS. If I were one of those over 750 members of the European Parliament here are the questions I would make and, if these were not answered in simple understandable terms, I would resign, not wanting to be a part of a Banana Union.

PS. "The current regulatory framework may have led to excessive investment by financial institutions in government debt." Really?

PS. Is there a way to defuse that bomb? Perhaps but any which way you try presents risks. One way could be to allow all banks to continue to hold all eurozone sovereign debt they current posses, against a 0% risk weight, until these mature or are sold by the banks; and, in steps of 20% each year, bring the risk weight for any new sovereign debt they acquire up until it reaches 100%... or more daringly but perhaps more needed yet set the risk weight for any new sovereign debt acquired immediately to 100%, so as to allow the market to send its real messages. 

The same procedure could/should be applied all other bank assets that currently have a risk weight below 100%, like for instance residential mortgages.

Would it work? I don’t really know, a lot depends on how the market prices the regulatory changes for debt and bank capital . But getting rid of risk weighted bank capital requirements is something that must happen, urgently, for the financial markets to regain some sense of sanity.

PS. An alternative would be doing it in a Chilean style. Being very flexible with bank capital requirements, even accepting 0%, even having ECB do repos with banks non-performing loans: BUT NO dividends, NO buybacks and NO big bonuses, until banks have 10% capital against all assets, sovereign debts included.

PS. I just discovered that Sharon Bowles, MEP, 
Chair Economic and Monetary Affairs Committee
 of the European Parliament, in a speech titled "Regulatory and Supervisory Reform of EU Financial Institutions – What Next?
 at the Financial Stability and Integration Conference,
 2 May 2011, said the following:

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

That is very clear warning that something is extremely wrong... and yet nothing was done about it.

PS. And in 2015 the European Commission also described the problem with the zero-risk weighted sovereign debts within the eurozone.

PS. https://perkurowski.blogspot.com/1998/11/burning-bridges-in-europe.html

PS. In Financial Times 2004: “How long before regulators realize the damage, they’re doing by favoring so much bank lending to the public sector? In some countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits”

The empowerment of the Bureaucracy Autocracy

“Assets for which bank capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

@PerKurowski

There are issues much more important for the future of the euro and the EU than who becomes Draghi’s successor at ECB

Sir, Wolfgang Münchau holds that “Draghi’s successor needs intellectual curiosity and a willingness to admit errors” “How not to select the next ECB president” June 3.

Of course, that should be a sine qua non quality of all candidates. The real problem though is that anyone chosen to become the new president of ECB could get trapped in a web of groupthink, and solidarity requirements, which impede the admittance of the mistakes.

Therefore, before choosing the next president some questions vital to the future of the euro and EU need to be made, not only to denounce mistakes, but to listen what the candidates have to say about it.

For instance if I was a newly elected first time European Union parliamentarian, at the first opportunity given I would ask: 

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 sovereigns, like Greece, 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?

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?

Colleagues, I do not know who should answer us these questions, but the candidates to succeed Mario Draghi as president of ECB, should they not at least give us their opinions on it?

@PerKurowski

Any winner in a second Brexit referendum should want to make sure his would not be a Pyrrhic victory.

Sir, Simon Kuper writes: “Only voting Remain will end the stress and tedium (the national divide will remain whoever wins)”, “How Remain can win a second referendum” April 20.

Of course the national divide will remain, but the question is whether it will remain the same whoever wins the second referendum? Could the divide not increase? Who could, if winning, be more capable to set a course towards national unity, Brexiters or Remainers?

Kuper opines, “Remain needs to sound as patriotic as Leave. It must present the UK as a European power, not a sorry victim of Europe.”

Yes, of course, but have the Remainer done so? I don’t think so.

A powerful Remainer would have imposed conditions on Europe that would make it easier to convert Brexiters. Of that nothing has been seen. (A powerful Brexiteer would have looked for the same in order to convert Remainers).

A powerful Remainer might have started out for instance by questioning Michel Barnier as the European negotiator, as there were indications of him having conflicts of interest. (A powerful Brexiteer should have had to do so too).

A powerful Remainer would have asked Europe for a clear answer on how they intend to solve the problem with having assigned a 0% risk weight to all Eurozone sovereign that take on debt in a currency that de facto is not their own domestic (printable) one. I mean a powerful Remainer would not risk standing their with egg on his face having won the second referendum and then having nothing to remain in. (A powerful Brexiteer might not really have had to do so).

Kuper also opines “In a second referendum, Remainers can borrow the anti-elitist language of Leave to inveigh against privileged Brexiters.” 

Yes, that could help the Remainers to win the referendum, but that would also increase the chances of the divisions growing and they having won a Pyrrhic victory.

Sir, at the end of the day Britain’s problem is that the Brexit vs. Remain debate was taken over way too much by those wanting to profit on it by it turning it into a battle between good and evil. If you do not possess a sufficient strong elite capable of stopping such nonsense, you will pay the consequences, 

Sir, when thinking about what second referendum result would have the best possibilities over to regain some workable unit, each day that passes, makes me feel closer to have to give, a quite reluctant, “Brexit” response to that.

PS. London’s West End needs urgently an Oklahoma revival adapted to Britain. “The Brexiters and Remainers should be friends”

@PerKurowski

To unite Britain, Brexiters and Remainers must negotiate a compromise. Sadly, its polarization profiteers object to that.

Sir, Martin Wolf writes: “Brexit, has weaponised identity, turning those differences into accusations of treason. … Once the idea of “treachery” becomes part of political debate, only total victory or total defeat are possible… The country is so evenly divided, and emotions are so intense, that resolution is at present impossible” “Britain is once again the sick man of Europe”, April 18.

Indeed, as I wrote to Martin Wolf on April 13th, when walking on Fleet Street I heard a 7-8 years old girl ask: "Mommy, what's worse murder or Brexit?” Thank God, in this case, the mother was clear about the answer. 

But that question must have popped up in this girl’s mind, as a consequence of a growing worldwide radicalization. Children elsewhere could also be thought asking similar questions, like: murder or Trump, murder or climate change, murder or filthy rich, murder or whatever.

Much of it is the direct result of that creating division, especially in these days when messages of hate, envy or fake news, can be sent out to millions at zero marginal cost, is a much better business proposition than uniting… or reporting real news.

Sir, honestly, how many efforts have been invested by Britain’s elite in requesting changes to EU that could make sense to Brexiters, or to design a Brexit that could be acceptable for Remainers? I believe way too little!

Now when Wolf’s asserts that Britain’s most important crisis is economicand that “Britain is once again the sick man of Europe”I am absolutely not sure about that. Wherever you look in Europe you find way too many symptoms of economic and social ailments. 

For instance, just the fact that Eurozone’s sovereign were assigned a 0% risk weight, even though they take on debt in a currency that de facto is not their domestic (printable) one, presents more dangers to EU, than a Brexit would present to a Britain with a Pound based economy.

Sir, has FT played a responsible role as a unifier? Since we all have to live with our own consciences, which is not for me but for you to respond.

Let me though here say that as much as the little girl’s question shocked me, more did your ample coverage/publicity given to a minuscule “Extinction Rebellion” “Inside the new climate change resistance” April 11. That group predicates and “plans mass civil disobedience”, and is one that has wet dreams such as: “After two previous attempts to get herself arrested, Farhana Yamin …hopes she will soon see the inside of a police cell”.

Finally, and back to Brexit, if as Wolf says: “only total victory or total defeat are possible”,what do you believe Sir poses the greatest opportunities for Britain to ever become united again, Brexit or Remain? (I have an inkling that each day that passes, makes me feel closer to have to give a somewhat reluctant Brexit response to that)

PS. London’s West End needs an Oklahoma revival adapted to Britain. “The Brexiters and the Remainers should be friends”

 @PerKurowski

The 0% risk weight assigned by Eurozone authorities to Greece’s sovereign debt helped put that nation’s weaknesses on steroids.

Sir, Tony Barber quotes Roderick Beaton’s Greece: Biography of a Nation, with a Greek former government minister saying in 2017 that the homegrown causes included “poor governance, clientelism, weak institutions [and] lack of competitiveness”. For his part, Beaton observes: “Systemic problems . . . combined in a toxic way with structural weaknesses in the European project, particularly the systems devised to oversee the single currency without a single fiscal authority for the eurozone.” “Greece’s eternal conflict”, March 23.

I have not read the book but, if a former government minister can describe Greece as he does it should be absolutely clear that such sovereign does not merit a 0% risk weight, much less so when it is taking in debt denominated in a currency that de facto is not it domestic (printable) one. 

But yet the Eurozone authorities did so, which of course only could help to feed “poor governance, clientelism, weak institutions [and] lack of competitiveness”

The sad part is that those authorities have refused to recognize their mistake, and so Greece has been forced to take the full blame for its crisis. EU, what a Banana Union! 

@PerKurowski

Should we prohibit divergent perceptions of credit risk? No and yes!

Sir, Martin Wolf writes: “In a recent paper, Marcello Minenna of Con-sob (Italy’s securities regulator) argues that divergent perceptions of credit risk across member states reinforce divergent competitiveness in goods and services. This puts businesses in peripheral countries at a persistent disadvantage, which becomes worse in times of stress.” “The ECB must reconsider its plan to tighten” March 6.

So should we prohibit divergent perceptions of credit risk? No and Yes!

Absolutely no! The existence of divergent perceptions of credit risk is crucial for an effective allocation of credit.

Absolutely yes! Bank capital requirements based on divergent perceptions of credit risk guarantees an inefficient allocation of credit.

The truth is that businesses in peripheral countries are less at disadvantage for their countries being perceived risky, than for the regulators, or other authorities, considering that there are others much safer. The risk weight for the Italian sovereign, courtesy of the EU authorities is 0%, while the risk weight of an Italian unrated entrepreneur is 100%. Need I say more?

Wolf opines, “The painful truth is that the eurozone is very close to the danger zone [as] the spectres of sovereign default and ‘redenomination risk’ — that is, a break-up of the eurozone — may re-emerge”. Indeed, and the prime explanation for that is precisely the 0% risk weights assigned to its sovereigns, those de facto indebted in a currency that is not denominated in a domestic (printable) currency.

We’ve just celebrated the 20thanniversary of the Euro. The challenges its adoption posed were well known. What has EU done to really help confront those challenges? Very little to nothing! In truth, with its Sovereign Debt Privileges, they have managed to make it all so much only worse. Sir, considering that, for someone who truly wanted and wants the EU to succeed, it is truly nauseating to see the daily self-promoting tweets from the European Commission.

@PerKurowski

More than between left and right, the division is between tax paying citizens and witting or unwitting possible redistribution profiteers

Sir, Wolfgang Münchau writes, “Liberal democracy is in decline for a reason. Liberal regimes have proved incapable, of solving problems that arose directly from liberal policies like tax cuts, fiscal consolidation and deregulation: persistent financial instability and its economic consequences” “The future belongs to the left, not the right” February 25.

The risk weighted capital requirements placed on top of any natural risk aversion distorts the allocation of bank credit in favor of what is perceived as safe and against what’s perceived as risky, has nothing to do with liberal policies. The risk weights of 0% the sovereign and 100% the citizens, just puts crony statism on steroids.

Münchau also “The euro, too, was a liberal fair-weather construction.” That could be but when EU authorities assigned a 0% risk weight to all public debt of eurozone sovereigns, denominated in a currency that is not their domestic (printable) one no one could call that a liberal construction. It was idiotically dooming the euro to failure.

Sir, I feel left or right labels do not really define what we citizen are up against. Our real adversaries are those I have come to call redistribution profiteers. In my home land Venezuela, where the central governments some years has received 97% of all export revenues, that is easy to see. But even in the rest of the world that is happening, unfortunately without being sufficiently understood. Much of it is the result of citizens lacking the most basic societal information, namely how much their central and local government receive in income, from all taxes, per citizen. 

Of course taxes are needed but such per citizen data, published regularly, would also put pressure on improving the day-to-day quality of government bureaucracy. I mean we want our taxes to be spent well. Don’t we?

PS. As a self declared radical of the middle, or extremist of the center, I feel the best hope we now have to improve our societies is by means of an unconditional universal basic income. That UBI should be 100% paid for, be large enough to help all reach up to jobs in the real economy and be small enough so as not allow anyone to stay in bed.

@PerKurowski

What good is it to celebrate the euro’s first 20 years if, as is, it won’t make the next 20?

Sir I refer to Martin Wolf’s “Marking the euro at 20: the eurozone is doomed to succeed” January 16.

November 1998 in an Op-Ed titled “Burning the Bridges in Europe” I wrote: 

“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.

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, 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 countries 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.”

Sir, twenty years later those observations are still valid, and way too little has been done to solve the challenges.

Now add to that the fact that even though Eurozone sovereigns take on debt in a currency not denominated in their own domestic printable one, EU authorities have assigned a risk weight of 0% to all of them. That all points to that it will end badly.

So Sir, though Martin Wolf raises many more or less valid alerts and gives some recommendations worth heeding, he should also be thinking about how to get the euro out from that “0% risk” death-trap corner into which it has been painted.

@PerKurowski

The world’s banking systems are dangerously fragile, courtesy of inept and statist regulators.

Sir, Martin Wolf writes: “Should we be concerned about the state of the world economy? Yes: it always makes sense to be concerned. That does not mean something is sure to go badly wrong in the near future… It is the political and policy instability, combined with the exhaustion of safe options for credit expansion, that would make handling even a limited and natural short-term slowdown potentially so tricky.” “Why the world economy feels so fragile” January 9.

Sir, as you know because of the thousands of letter I have obsessively written to you on this subject, which you have equally obsessively ignored, I am absolutely sure something has been going very badly for a long time, and will explode… perhaps the sooner the better.

In April 2003, as an Executive Director of the World Bank, in a board meeting I said, "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

Likewise, a world obsessed with allowing banks to leverage their capital immensely only because something is perceived or decreed as safe, is doomed to overload what’s “safe” way too much with debt, while, relative to that, financing what’s “risky” way too little. That will sure exhaust, sooner or later, any "safe options for credit expansion". That makes for a hell of a fragile bank system. 

Wolf writes, “The long-term credit cycle reached its denouement in the disastrous financial crisis of 2007-08.” 

That crisis was solely caused by excessive exposures to what was perceived as safe, mortgages to residences and AAA rated securities, against which investment banks in the US and all banks in Europe had to hold little capital. Did regulators wake up and change their risk weighted capital requirements, which are so idiotically based on the idea that what’s perceive as risky is more dangerous to our banking system than what’s perceived as safe? No! No real denouement there.

And then Greece exploded in 2009, and the fact that statist EU authorities had assigned all Eurozone sovereigns a risk weight of 0%, which allowed EU banks to lend to Greece against no capital requirement at all, which clearly doomed the not so well managed Greece to excessive indebtedness, does not even appear listed among the causes for its tragedy. No denouement there either. EU sovereigns are still risk-weighted 0%.

Sir, just look at houses. Easy financing made available by very low capital requirements turned what used to be homes into investment assets. All this while entrepreneurs, those who could create the jobs so that house owners can afford to service their mortgages and pay the utilities, were denied credit or charged higher interest rates, because of higher bank capital requirements. Just you wait till that easy financing stream stops and too many house owners wish to convert their houses into main-street-purchase capacity again. It's going to be hell.

@PerKurowski

If there’s a re-vote on Brexit, what will the Remainers suggest Britain remains in?

Sir, Jeff Colegrave makes a well reasoned case of why, if there is a new vote on Brexit, it is on the Remainers’ shoulders to make very clear what they are supporting to remain in. “Remainers risk hubris without a positive case for the union” December 17.

The three outstanding problems Colegrave wants to have a clear definition on are:

How the Eurozone can avoid that a generation of youth becomes again sacrificed, on the altar of the common currency.

How the EU can avoid manifestly failing to adequately address the issue of migration. 

And “the lack of democratic political architecture within the European project, [which] cannot lightly be dismissed as some kind of arcane irrelevance. 

I could not agree more. I would be a committed Remainer, only if EU shows clear intentions to stop being such a Banana Union. You do not build a real United European States with a bureaucracy such as that currently present in Brussels.

Let me be clearer yet. If a Remain wins, the last thing British citizen, or all of their other EU citizens colleagues need, is for that to be presented as a triumph or an endorsement of Brussels.

PS: With respect to the sacrifices on the altar of the common currency, I have sent you many letters, in which I have blamed EU authorities for the tragic over-indebtedness of many euro sovereigns, when assigning to the public debt contracted in a currency that de facto is not their domestic (printable) currency, for purposes of bank capital requirements, a 0% risk weight. But of course these letters are ignored, because Per Kurowski suffers just an obsession about current bank regulations. 

@PerKurowski

When EU authorities assigned Greece a 0% credit risk they doomed that nation, inexorable, to suffer a real life Greek tragedy.

Sir, Lord Aldington, defending a Remain writes: “Greek tragedies seldom have a happy ending; they are about inexorable fate. There is nothing inexorable about being wilfully blind to our situation. Integration works on the basis of partnership.” “Enter the tragic Chorus, tearing at their clothes and screaming” November 30.

Indeed, Hear, hear, but let us also not forget that the partnership Lord Aldington supports, caused a real life Greek tragedy. When the European Commission assigned Greece a 0% credit risk, it doomed it, inexorably, to tragically excessive debts, which to top it up, are denominated in euros, de facto not Greece’s domestic (printable) currency.

If they do not get rid of the statist, distortive and dangerous risk weighted capital requirements for banks; there will be many more similar Greek tragedies in EU, and around the world.

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

@PerKurowski

Worse than Italy “sleepwalking into instability” is the European Commission pushing the Eurozone into it fully awake.

Sir, Jim Brunsden and Miles Johnson writes the European Commission stepped up action on Italy’s rule-busting 2019 budget, warning that its plans to stimulate the economy through increased borrowing, risks “sleepwalking into instability”. “Brussels warns Italy’s budget threatens ‘instability’” November 22.

Of course, as Pierre Moscovici, EU economy commissioner, says: “this budget carries risks for Italy’s economy, for its companies, for its savers and its taxpayers”.

The sad fact though is that reaching an acceptable agreement on the budget issue would still be like papering over Italy’s and EU’s real underlying problems, not solving much.

The European Commission must/should know: 

1. About the challenges the Euro imposed on Eurozone members and that it has, for soon twenty years now, done nothing to resolve. 

2. That, for purposes of bank capital requirements, assigning a 0% risk to all sovereign borrowers within the Eurozone, those who de facto have their debt not denominated in a domestic (printable) currency, is a regulatory subsidy that impedes markets to signal the real costs of sovereign debt; which will necessarily cause many of its members to incur in dangerous excessive levels of public debt.

Before EC face up to these issues and does something real and sustainable about it, though much mightier, it has still not earned much right to lecture Italy.

Just like all regulators and central bankers, believing that what bankers perceive as risky is more dangerous to our bank systems than what bankers perceive as safe, have no right to lecture us on risk management.

EU can’t keep forcing its members to walk the plank, as it did with Greece, and still remain a viable union. Anyone against a Brexit and for a Remain should be very aware of that… that is unless his position has nothing to do with EU and all to do with local politicking.

@PerKurowski

Should not a “State of the European Union” analysis be an indispensable document, when searching for a solution to the Brexit vs. Remain quantum entanglement?

George Parker and Alex Barker discussing the “brutal reception in cabinet and in parliament the Brexit withdrawal agreement received mention one cabinet minister saying: “The people who are criticising the deal don’t have any alternative, that was true before the Chequers meeting, it was true before this week’s cabinet meeting and it’s still true now. People can suck their teeth and say it’s a betrayal and talk about vassalage, but they don’t seem to have given any thought to what the alternative might be.” “May heads for a hard sell” November 17.

In terms of Brexit mechanism that might be true, but there is of course also the alternative of holding another referendum, which might provide a Remain instead. 

What I sorely miss in the whole Brexit vs. Remain heated discussions is a “State of the European Union” analysis that would help to bring some perspective on it all, and that could also be useful to all Europeans, independent from what happens down the line.

I say that because I sincerely think the EU is not doing well, and that there are huge problems brewing there, which sometimes, like yesterday, have me thinking that though Brexit is an absolutely awful solution, a Remain could be even worse.

Sir, could you imagine the national embarrassment for Britain to change its mind and go for a Remain, and then finding EU gone? 

PS. Quantum entanglement is a physical phenomenon which occurs when pairs or groups of particles are generated, interact, or share spatial proximity in ways such that the quantum state of each particle cannot be described independently of the state of the other(s), even when the particles are separated by a large distance—instead, a quantum state must be described for the system as a whole.

@PerKurowski