Way too little has been done in 20 years to counter the Eurozone losing its foreign exchange adjustment tool.

Sir, Martin Wolf writes: “Andreas Kluth wrote in Handelsblatt Global this month: ‘A common currency was supposed to unite Europeans. Instead, it increasingly divides them.’ He is right” “The Italian challenge to the eurozone” June 20. 

Of course he is!In 1998, on the eve of the Euro, in an Op-ed titled “Burning the bridges in Europe” I wrote: 

“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.

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.”

So clearly “All of this was predicted” Yes, but why has so little been done about it? Why have EU technocrats instead wasted their time on so many other minutiae?

What I did not foresee though, really because I had no idea of it, was that with the risk weighted capital requirements for banks, that which assigned a risk weight of 0% to sovereigns and 100% to citizens, fatal distortions in the allocation of bank credit were introduced, causing “high level of public debt” and making it all so much harder on the eurozone.

@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?

Europe has been way to blasé about how the divisive forces of a common Euro within a not fully integrated Europe could gather strength.

Sir, I refer to Martin Wolf’s “Italy’s new rulers could shake the euro” May 23.

On the eve of the Euro, November 1998, in “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.

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.”

One could have expected that the fundamental menace that the Euro poses to the EU should have been in the forefront of everyone’s mind, and that much more would have been done to mitigate the dangers. But that has not really happened as its authorities wasted their time in so many other relative minutiae.

But what I never saw or knew when I wrote that article, as I had really nothing to do with bank regulations, was that bomb that was implanted in the middle of Europe, and in much of the rest of the world, that which required banks to hold more capital when lending to the citizens than when lending to the sovereign. That had to cause that excessive public sector indebtedness, which has now set the Euro problematic on steroids.

Sir, looking at what lays in front, one cannot help to think about the possibility that Brexit ends up being for Britain a very timely blessing in disguise.

@PerKurowski

Though benefitting from the Euro, the weaker Euro-nations still pay quite a lot for Germany’s export advantages.

Sir, Paul Clifton writes about the advantages provided to German exports by the fact that other countries help to keep the Euro value down "The euro gives Germany a permanent cost advantage" August 23. That, which is entirely correct, should also have us refer to the disadvantages for those other.

In November 1998, just before the launch of the Euro, 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. 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.”

And in November 2009, in a letter to you I asked about “what it would have looked like if for instance Greece still had the Drachma and Germany the Deutsche Mark… 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.”

@PerKurowski

The haircuts that will result from the mother of all market riggings... will be staggering.

Caroline Binham writes about the Bank of England’ “potential rigging of money market auctions”, “BoE embroiled in fraud probe of crisis-era liquidity moves” March 5.

Sir, whatever those rigging could have been, they must be really minuscule when compared to the mother of all riggings; that which occurred when regulators rigged bank regulations in favor of the sovereigns, to the extent of considering some of these infallible.

Sir, when a sovereign takes on too much credit, it will either pay you back a fraction, this is known as a regular haircut, like that Greece wants to do; or give you a negative interest rate haircut, like Germany does; or give you an inflation haircut, as that which they officially target; or give you a tax increase haircut (we citizens hold de-facto CoCos of our sovereigns); or give foreign currency based investors, a devaluation haircut, like that currently given by the Euro. And there might even be other haircuts I have missed.

And so, giving many sovereigns a zero risk-weight for the purpose of setting the capital requirements for banks, defies all rationality, and can only be explained in terms of the regulators rigging the regulations; whether for ideological reasons or only to ingratiate themselves with their bosses, the governments.

The consequence of a zero risk weight is that banks are able to leverage their equity immensely when lending to the sovereign and so, guaranteed, banks will lend the sovereign too much at too low interest rates… and so the consequential sovereign haircuts, in any which shape or form they come, will be staggering large.

Especially so when governments are, by for instance Martin Wolf, egged on to take advantage of “favorable market conditions for public borrowings”, in order to take on major infrastructure projects.

What was now devalued in Venezuela was the official exchange rate of the bolivar, not the much less valued real rate

Sir, I need to point out a certain lack of preciseness in my friend Moises Naim’s “Venezuela’s devaluation is another desperate Chavez move” February 14. What was now devalued was the Venezuelan official exchange rate, since Venezuela’s “real” exchange rate, the result of dividing all the bolivares paid for all dollars purchased, has been suffering much larger devaluations for a long time. Just the fact that in Venezuela it is prohibited to make reference to a FX rate other than the official, does not mean it does not exist. Here you find for instance a link to the Green Lettuce.

In fact devaluing the cheap official rate for accessing dollars can in some circumstances could even help to revalue the “real” rate, at least initially, for a short while.

And in reference to domestic gas prices I also I believe it is important to point out that the current government, which calls itself socialists, has used up more value giving out gas basically for free, than the value in all their other social programs put to together, and, be amazed, this fact was not even an issue in the recent elections… the opposition has kept mum about it too, for about a decade.

Can accounting really be allowed to base itself on known fictions?

Sir it is with amazement I read Barney Jopson, Benedict Mander and Miles Johnson reporting on how “Venezuela devaluation dents big companies”, February 12.

I understand the locals are prohibited from even thinking in terms of a different foreign exchange rate than what the current oilygarchs in power allows them to, though even so, most of them do, at least in the shadows.

But that grown-up foreign companies hang on to a rate that drives only a part of the economy, and have not created reserves to cover for this and other adjustments of the fx fiction to come, is astonishing. It sort of falls in the same category of naiveté as bank regulators believing that an AAA to AA rating has so little implicit risk so that they can allow banks to leverage over 60 times to 1 on such exposures.

Honestly, something is terribly wrong if auditors can ok balance sheets based on a known Bs. fiction.