In the Eurozone’s sovereign debt mine there is a choir of canaries going silent but, seemingly, that shall not be heard.

Sir, Gideon Rachman concludes, “Almost all of the modern threats — from a resurgent Russia to climate change and trade wars — are much easier for Britain to deal with, by using the collective strength of the EU.” “Brexit is an idea left over from a bygone era” June 25, 2019.

That is correct, but only if we exclude mentioning the problems within Europe. I refer specially to the sovereign debt bombs that are ticking within the Eurozone, the agents of “the EU’s most federalising project — the euro.”

Yes, that Germany “is stubbornly resisting demands from Brussels and Paris for deeper economic union” does surely not help but the real problem is that the biggest problem with the Euro, is not really acknowledged. 

When Greece turned into a dead coalmine canary, how much discussion were there about the fact that EU authorities had assigned Greece, as to all other Eurozone sovereigns, for purposes of bank capital requirements, a 0% risk weight? And that 0% risk weight was decreed even though all Eurozone sovereigns contract debt denominated in a currency that de facto is not their own domestic printable one.

Basically no discussion at all even though that 0% risk weight guarantees European banks are going to lend way too to the Eurozone’s sovereigns. Greece was small and ended being forced by ECB to walk the plank. But if Italy’s debt bomb explodes would it accept doing so? I doubt it.

Sir, to be a Remainer without requesting from EU a clear plan on how to defuse that still ticking debt bomb that could take the Euro down and perhaps the EU with it, seems not to be a very respectful position either.

@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

If Brexit ends in tears, Theresa May is clearly not the only one that should be blamed and not be forgiven.

Sir, Martin Wolf writes that Theresa May needed to begin Brexit negotiations “from the interests of the country. She has failed to do so… If the result is no deal, Mrs May could not be forgiven. “May is set on taking a hideous gamble” March 22.

Yes, for an outsider like me, Theresa May seems indeed to have managed very badly Brexit negotiations. But just as Lubomir Zaoralek the minister of foreign affairs of the Czech Republic wrote July 2016 in FT “Europe’s institutions must share the blame for Brexit”, the EU Brexit negotiators, like Michel Barnier, cannot be said to have no blame in any failure. 

And also, again for an outsider like me, I have seen little to nothing of all those Remainers giving, “from the interests of the country”, any constructive advice or cooperation in order to reach a more satisfactory solution. As I see it, the Brexit-failure political profiteers, as well as those eager to enhance their reputation by being able to point out “I told you so”, have refused to cooperate or to give any constructive advice, and so all they should also share the blame of a failure… and “not be forgiven.”

As far as I know a Hard Remain option that could have alleviated some of the Brexiters’ main justified concerns was never developed.

PS. A question: If because of the insane 0% risk weighting of their sovereigns the Eurozone breaks up, and drags down EU with it, would Britain be better off having Brexited or having remained in EU? 

@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

Brexit is sure a bad idea, but how can you be sure Remain is not even a worse one?

Sir, Alex Barker and Jim Brunsden quote Catherine Barnard, a professor of EU law at Cambridge university: “Never before has a treaty been constructed of this kind,” “The EU is a unique organization. What the Brexit process has revealed is just how deep the integration is in reality.” “Accord leaves Britain bound to Brussels” November 16.

On the first, indeed, to for instance adopt a Euro in order to push forward a union instead of letting a union produce a common currency, is a truly strange way to construct a union.

But, on the second “how deep the integration is in reality” I beg to differ. Having a member like Greece walk the plank, especially as EU authorities were most to blame for its problems, is not the doings of a real deep union.

Sir, let me refer to a speech delivered by Mario Draghi, President of the ECB, at the Frankfurt European Banking Congress, given today, “The outlook for the euro area economy”. 

It concluded with: “I want to emphasize how completing Economic and Monetary Union has become more urgent over time not less urgent – and not only for the economic reasoning that has always underpinned my remarks, but also to preserve our European construction.”

I agree, because as is, Italy will not walk the plank as Greece did, and that could bring on the end of the euro, as we now know it, which could bring an end to the European Union, as we know now it, or, clearer yet, as we perhaps really don’t know it.

Sir, whether Brexit or Remain supporters, does not Britain (and all other UE members) have the right to know what “completing Economic and Monetary Union” to “preserve EU our European construction”, which Draghi urges really entails?

Draghi also mentioned “as urgent as the first steps were in euro area crisis management seven years ago”, “The completion of the banking union in all its dimensions, including risk reduction, and the start of the capital markets union through implementing all ongoing initiatives by 2019”

Sir, does not Britain, a nation where banking means so much, have the right to know exactly what that entails so that it banks are not castrated in the process?It is not just me a foreigner asking. Let me remind you that seven years ago, Alex Barker in [Mr. Brexit Negotiator] “Barnier vs. the Brits” wrote about the fears of Sir Mervin King that Brussels reforms would reshape a vital British industry, banking, to the benefit of eurozone rivals.

Draghi also said: “Household net worth remains at solid levels on the back of rising house prices and is adding to continued consumption growth.” 

That is an untrue statement. A much truer one would be: “Household net worth remains very fragile since it rides almost exclusively on rising house prices, as a consequence of the distortion produced by too much and too favorable financing being offered for the purchase of houses. A distortion that helped to anticipate much of the consumption we have seen, but that will come back and hurt house owners, whether by house prices falling, or hurt everyone, by inflation eroding our real consumption power.

Sir, when that happens, and the crisis needs to be managed so as to impede the destruction of all social cohesion, would you prefer to do that on a national level, instead of on the level of a union in which very few know how to sing its anthem?

Sir, I’m no one to give a recommendation but, should not the Brexit vs. Remain discussions refer more fundamentally to the future of Britain and of EU, instead of being turned into another profitable venture for some opportunistic polarization profiteers?

Should not FT inform its readers, in a much more balanced way, of all challenges that lay ahead, not only those of a Brexit but also those of a Remain?

A long time friend and admirer of Britain 

@PerKurowski

Should not EU cut its grand bargain with all its over-indebted sovereigns before any Brexit vs. Remain voting took place?

David Folkerts-Landau, the chief economist at Deutsche Bank writes, “An Italian debt crisis poses an existential risk to the eurozone. The current game of chicken is irresponsible. It also ignores the dangers inherent in any financial crisis, the costs of which would dwarf those of having the ESM step in”, “Europe must cut a grand bargain with Italy” November13.

Of course Italy cannot be expected to pay €2.450 billion, meaning over €40.000 per citizen, denominated in a currency that is de facto not Italy’s real domestic (printable) currency. Be sure Sir, Italy will not walk the plank, as Greece had to do.

But of course what Folkerts-Landau writes, “The option of a debt write-down with private sector involvement is also unfeasible”, is not possible either.

One way to solve Italy’s (and Europe’s) sovereign debt crisis as painless as possible could be by using a Brady bond/zero coupon mechanism as used creatively by the US in 1989 during the Latin American debt crisis. I mentioned the use of those bonds to FT in a letter of 2008, “"Après us, le déluge", as did William R. Rhodes in 2012 with “Time to end the Eurozone's ad hoc fixes”.

A complementary tool to help fix Italy’s (Europe’s) banks, as I wrote to FT in 2012, would be to do what Chile did during its mega bank crisis in 1982 namely: a. having central banks issue bonds in order to buy “risky” loans not allowing banks to pay dividends until those notes had been repurchased; b. forcing banks to hold more capital with central banks subscribing shares not wanted by the market with these shares resold over a determined number of years and c. generous financing plans to allow small investors to purchase equity of the banks.

Obviously, for Italy’s (and Europe’s) banks to be really helpful to the real Italian economy, it would be imperative to get rid of the credit risk weighted equity requirements for banks, those which erode the incentives for banks to give credit to those who most could do good by receiving it, like SMEs and entrepreneurs.

What is absolutely true though is that to solve Italy’s (Europe’s) problems, more zero risk weighted loans to the sovereigns, in order for government bureaucrats to allocate the resources derived from bank credit, will just not cut it… no matter how much haircut on Italy’s (or other European sovereign’s) debt you accept.

Europe would need to start the process of helping Italy (and Europe) by getting rid of all current high-shot regulators. Not only would they be too busy, as until now, covering up their mistakes, but also, as Einstein said, “We can't solve problems by using the same kind of thinking we used when we createdthem.”

Sir, I suspect all in FT would vote for a Remain if given a chance, but before doing so, would you not prefer EU authorities to clearly explain to you how they intend to fix the European sovereign debts overhang. That which if not fixed will crash the Euro and thereby most probably also crash the European Union? Sir, would it not look truly silly Remaining in something gone?

PS. It is clear that without the help of those wanting immensely more to save the European Union than to save some cushy jobs, the future of the EU very sadly looks very bleak.

@PerKurowski

With so much debt in a currency that is really not their domestic one, has Greece really made it to the other side?

Tony Barber opines “Greece is finding its way back to domestic stability and a secure place in the European order” “Greece shows how a maverick nation can recover from disorder” November 1.

Really? Greece debt is around €345bn euros, about €32.000 per citizen, in a currency that for real practical (printing) purposes is not their own?

That is a result of ignoring the fundamental Gordian Knot in European Union, by means of EC’s Sovereign Debt Privileges, that of assigning an absolute zero credit risk to sovereigns in the eurozone who are indebted in a currency that is really not their absolute own.

Britain and Sweden resisted adopting the euro. Had Britain done so, then Brexit would have been a reality almost unanimously supported, a long time ago.

I do sincerely suggest that any Remain proponents, if only to safeguard their own reputation, require a response from EU of how it will go about to unknot that knot, before it brings EU down.

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

https://teawithft.blogspot.com/2018/10/eu-authorities-assigning-italy-like.html

@PerKurowski

Is Italy’s 0% risk weighted sovereign debt in euros really denominated in their own currency? NO!

Sir, on the eve of the euro, November 1998, in an Op-ed titled “Burning the bridges in Europe” I wrote: “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.”

Now you write: “On Tuesday the European Commission, taking a step without precedent in the euro’s 20-year life, demanded that Italy should re-submit its 2019 budget” “Roman theatre clashes with the EU rule book” October 25.

EC’s demand is the direct consequence of Italy no longer possessing the escape valve that a devaluation of their lira used to signify. Not only that. As Italy’s debt is no longer denominated in liras, it will not really have the domestic “benefit” of inflation in their own devalued currency. It is now supposed, like Greece, to serve its debt in euros partly made stronger, by surplus countries like Germany. 

To rub salt into the wound, EU authorities, the European Commission, for the purpose of the risk weighted capital requirements for banks, by means of something known as “Sovereign Debt Privileges” or “Equity Capital Privilege”, assigned a 0% risk weight to Italy, which of course had to doom it to unsustainable public debt.

Sir, it is mindboggling how little EU has done to really confront the challenges posed by the euro, those that if unresolved will bring the EU down.

Similarly, it is mindboggling how in all overheated Brexit/Remain discussions, so little attention has been given to the EUs very delicate conditions. How would history recount if the day after Britain capitulates and hands over its Remain, the EU would break up?

Sir, again, I am strongly in favor of the European Union, but not a Banana Union run by eurocrats whose children or grandchildren do most certainly not know how to sing the European Union’s anthem, and if they did, would never put as much enthusiasm into it as Sofia Goggia did when singing her Italy’s national anthem at the Winter Olympics of 2017. 

@PerKurowski

Does Britain risk more with Brexit than EU? Not really. So has Britain any special wishes for if EU offers a Remain?

Sir, Martin Wolf writes: “The chances of a calamitous outcome, with poisonous long-term results, are high. Some of the more fanatical Brexiters would appear to desire this.” “Britain plays with fire over Brexit” March 8.

That’s true, but do not some fanatical Remainers seem to wish that too, so that they could later rub in all over our faces their “ See I told you so!”

Now Tony Blair argues, “If our government were conducting a negotiation which genuinely sought to advance our country’s interests, that negotiation would include the possibility of Britain staying in a reformed Europe”. Martin Wolf is also quite open to this idea, although he finds that “in practice, this option is highly implausible".

Plausible or not, I think the idea has a lot of merit, specially because at this particular junction it seems to me that EU has more to lose from Brexit than Britain.

So, if Britain I would ask EU, what would you like to offer for us to remain in EU? But, for that, Britain should know and spell out what that offer has to include, as a minimum. Does Britain know? Who knows, perhaps the Wish List would contain all that which EU also needs in order not to crumble on its own.

Besides, even if a Remain offer is not extended and the Brexit process follows its course, going this route has clear advantages. That because it would define Brexit not so much as a “We against you EU affair” but more a reaction to mutual problems; and that could only make life more amiable between partners discussing divorce terms… that is unless one partner does not want to see any difficulties divulged.

@PerKurowski