If EU does not face and solve the challenges posed by the euro, it will break down.

Sir, you write, “Joining the euro meant losing the ability to depreciate its currency — long Italy’s safety valve when its competitiveness failed to keep pace with its neighbours.” “Italy needs real economic plans, not empty slogans” September 6.

On the eve of the euro in an Op-Ed I wrote, “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.”

And that EU authorities must have known was the main challenge the euro posed. And of course it is not only about Italy. Without the euro the Deutsche Mark would have revalued and Germany would not have its current trade surplus.

But what have the European authorities done to face up to that challenge? Basically nothing, just empty slogans. Instead EC have even dared to keep busy with helping to solve cases like persuading church authorities to establish non-discriminatory entry fees for the monasteries... that's acting like a Banana Union.

But, as if that was not enough they also went and risk weighted the capital requirements for banks for all EU sovereigns at 0%, which means that market interest signals on sovereign debt have been artificially lowered, and so that EU banks can easier finance any disequilibria... and that even though all Eurozone sovereigns denominated their debt in a currency that is not really their domestic (printable) one.

Sir, irresponsible EU authorities are dooming that beautiful dream of the European Union, to turn into a real nightmare… and I am truly surprised by how little that fact has played out in all the discussions on Brexit.

PS. Though Greece should perhaps have been risk-weighted 200%, EU authorities assigned it 0%. As a consequence, Greece took on too much debt; and EU ignored its responsibility for it. Now each newborn Greek carries a huge mortgage. Is that how a Union should behave? I don’t think so.

PS. I first read about that monastery fees issue in a brochure that the then European Commissioner for Internal Market and Services, Michel Barnier, handed out in June 2011 during a conference in Washington at the Brookings Institute.

PS. On a different topic: The following, from a transcript, is a question I made during that conference, and Mr. Barnier's answer.

"MR. KEROVSKY: Yes, my name is Pere Kerovsky. Europe is there -- is what it is because of a lot of willingness to take risks, and in fact partisan songs often include “God make us daring,” and Pope John Paul II asked us to fish in deep waters, not settle for the (inaudible). But the last 20 years we have had bank regulations that are based on perceived risk and that have introduced a risk adverseness into the system, obviously a crisis that detonated in triple A-rated land and sovereign is not a crisis because of excessive risk taking but because of excessive adverseness of risk. You still are going the same route. Does this mean, really, that Europe has called it quits? Has capitulated and doesn’t want to really go forward because they’re giving up their willingness to take the risks needed? 

MR. BARNIER: I was amused by your first reference to fishing in deep water. I was a fisher’s minister (laughter), so I’m very interested in that. There’s less and less fish in deep waters, you know that. Watch out. 

Don’t count on me to say it’s business as usual. It’s not possible. Perhaps it is what certain bankers wish or -- but it’s no longer possible for citizens. We are not there to prevent risk-taking. We’re there to prevent excessive risk-taking. The payers are not the ones who are taking risk; it’s the taxpayers. When I see how compensations and bonuses have been calculated with riskier and riskier systems since the riskier the more paid you were, I think it’s one of the reasons of the crisis, and you know it. Who paid in the end? Taxpayers here and elsewhere. But we’re not there to prevent risk-taking. Everybody has to assume the risk responsibilities and pay the price, and we have to know who is doing what. 

I don’t see how a general system, which is not there yet, in food transparency would prevent risk-taking, but I think we should take risk, and I take risk in my planning, but those who take risks must be ready to accept that it is well known and then assume the responsibility.” 

Sir, I hope you understand by now how far Michel Barnier was from understanding the risk of excessive regulatory risk aversion, that which caused the 2007-08 crisis explosion, because of especially excessive exposures by banks, against especially little capital, to what was perceived or decreed as especially safe.

@PerKurowski

The main challenges for Greece are the same main challenges for the Euro and for EU

Sir, I refer to Jim Brunsden’s and Kerin Hope’s “Athens faces challenging road ahead as it reaches milestone exit from bailout programmes” August 20.

The authors summarize what Greece must do in order to grow out of its current tragic predicaments with: “In exchange for a big debt relief deal in June” Greece must “Hit the targets” like sustaining “a primary surplus of 3.5 per cent of gross domestic product annually until 2022.” “Stimulate the economy”, “Fix the banks” “Create an investor-friendly environment” and “build investor confidence by completing flagship privatisations”

What? “In exchange for a big debt relief” That’s laughable! Is it not more the case of cleaning up bank creditors balance sheets, or being able to keep Greek credits on the books, relief? How much would all EU creditors of Greece have been able to collect from Greece? Would EU have invaded a fellow EU nation?

No, if Greece is to have a chance of meeting any of its commitments then at least two things must happen: 

First: The EU must find a sustainable way for solving the challenges posed by the Euro. When the Euro was being launched in an Op-Ed I wrote: “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” And Sir, that bomb, now soon 20 years later, has not been deactivated, and EU has wasted precious time on much more comfortable issues. EU needs to find sustainable solution to it, just pushing the debt-cans forward will not do.

Second: If EU wants to survive and become a Union, then it needs to act as an adult and learn to assume the costs of its own mistakes. Let me be clear, again for the umpteenth time. Had not EU authorities assigned a risk weight of 0% to the governments of Greece, and a 100% weight to the Greek tax paying citizens, then the difficulties of Greece, in comparison to those it now suffers, would be minuscule.

Sir, those opposed to Brexit, the Remainers, should be working at that. Otherwise the Brexiters might soon tell them: “You see, thanks to us, we got out of EU, in the nick of time.

@PerKurowski

​​FT, without fear and favour, take a long hard look at the incentives regulators dangle before banks

Sir, while discussing some possibly very shady FX operations, you correctly suggest that “the whole banking industry should take a long hard look at the incentives it dangles before traders” “HSBC case is another blow for trust in banks”, July 22.

But, why do you so steadfastly refuse to take a long hard look at the incentives the regulators dangle before banks?

By allowing banks to hold less capital against what is perceived decreed or concocted as safe than against what is perceived risky, banks can leverage more their equity, and the support they receive from the society, with the “safe” than with the “risky”.

And that incentive means banks can expect higher risk adjusted returns on what’s “safe” than on what’s “risky.

And so that incentive means banks will lend too easily to what’s safe and too little to what’s “risky”

And so because of that incentive the “safe-havens”, like lending to the sovereigns, the AAArisktocracy and financing houses will, sooner or later, become overpopulated, and therefore very risky.

And so because of that incentive the “risky-bays”, like SMEs and entrepreneurs, will be less explored and, in order to compensate for the discrimination, will have to pay more for credit, which makes these riskier yet.

And so because of that incentive, today billions in bank credit will be awarded in too favorable terms to those who do not deserve it, and thousands of SMEs and entrepreneurs will see their applications refused.

And so because of that incentive the real economy is mostly fed with carbs that makes it obese, and does not receive enough proteins to remain muscular.

Sir, what incentives do someone dangle before FT to have FT being so mum about these so horrible incentives that so distort the allocation of bank credit to the real economy… and all for nothing!

@PerKurowski ©