To salvage the European Union, its authorities must be held responsible for the travails of Italy, Greece and other.

Sir, with respect to what’s happening in Italy you write: “The guardians of the single currency failed to mend the roof while the sun was shining… Even if disaster has been averted on this occasion, the economic and political fragility of the eurozone remain all too clear” “Italy sets a stress test for the eurozone, again” June 2.

True. From the very start, soon 20 years ago, it must have been clear for all the proponents of the Euro that adopting it, meant for all countries using it giving up the possibility of adapt to different economic circumstances through foreign exchange rates adjustments.

And a Germany would benefit with a too weak for it Euro, and others, like Italy and Greece would suffer a too strong for them Euro.

What have the Eurozone authorities done to meet that challenge? Way too little! They busied themselves with all other type of lower priority issues and outright minutia. Worse yet, they also stupidly silenced the full disequilibrium signals that the interest rates on the Euro members’ public debt level could send the markets by assigning to all a 0% risk weight. Something that made the sun seem shine brighter than what it really did!

Fabio Panetta, the Deputy Governor of the Bank of Italy in a speech in London in February 2018, with respect to the possibility of raising the capital requirements on sovereign debt had the temerity to say: “The problem of high public debt should be addressed by Governments directly, with determination. It should not be improperly tackled with prudential regulation.”

If I were an Italian or a Greek, given a chance I would have told (shouted) him: 

“With your 0% risk weighing you regulators imprudently created temptations for our politicians to be able to take on much more public debt at much lower rates than would otherwise have been the case, and now you argue they should have been able to resist such temptations? Just the same way you argue that banks should have resisted the temptations to leverage over 60 times with assets that carried an AAA rating? Have you and your colleagues no shame?” 

Sir, while regulators keep on giving banks more incentives to finance the “safer” present consumption than the future “riskier” production, the chances for Europe (and America) to get out of its problems lie, at least in the case of Italy, as so many times before, in the strength of its economia sommerza.

@PerKurowski

Selling the notion of being able to make banks safe, at no cost, is pure unabridged populism.

Sir, I refer to Tony Barber’s “Renzi is the last hope for the Italian elite” January 2.

In it Barber attacks populism and writes about how important it is for Italy that “Mr Renzi’s reforms of the tax system, labour market, judiciary, public administration, electoral system and much more succeed”.

Again there is no reference to the unabridged populism contained in the notion that you can make banks safe, at no cost.

That populism is imbedded in the current risk-weighted capital requirements for banks; which allow banks to earn much higher risk adjusted returns on their equity on exposures perceived as safe than on exposures perceived as risky; with not one iota of regulatory concern about how useful for the economy such “risky” exposures could be.

These regulations, carried out in the name of saving the taxpayer from having to pay more taxes, is one of the most important obstacles that is hindering the taxpayers from receiving more taxable income.

That regulatory populism is doing as much damage to Italy, the Eurozone, Europe and the Western World as anything else. Without those regulations we might have had a bank crisis, but none as big as the current that resulted from allowing banks to leverage immensely with what was perceive as safe, like “infallible sovereigns” as Greece, members of the AAAristocracy, and the real estate sector in Spain.

If Renzi is not capable of demolish these populist bank regulations, Italy might still make it, but that would only be as a result of the strengthening of la banca sommersa.

FT, supporting the idea that Basel III is making our banks and our economies safer, is to support populists.

If the visible banks are not rationally regulated, there is no choice for the real economy than to run for the shadows.

Sir, the risk weight function which determines the current capital requirements for banks are based on two monumental mistakes.

The first mistake is that for reasons of simplification the Basel Committee oversimplified and decided that the expected unexpected losses of those perceived as safe will be much less than the expected unexpected losses of those perceived as “risky”. And that means that the perceptions of risks will either reward or punish… twice.

The second mistake is that the risk weights are “portfolio invariant” and which means these do not take account of the added risks of asset concentration, or the dissipation of risks by means of diversification. And that means that the risk of the banking system might be increasing exponentially, even while being reported as safer.

And all this leads to banks then earning higher risk-adjusted returns on equity when lending to the “safe” than when lending to the “risky”.

And the direct result is that those perceived as “safe” will have a subsidized access to bank credit, paid by negating the same to those perceived as “risky”.

And that guarantees banks will not be able to assist in helping the economy to get out of a secular stagnation, as alerted by Lawrence Summers in “Washington must not settle for secular stagnation”, or to avoid that weak destabilizing growth to which Edward Luce refers to in “Anglo-Saxon trumpeting will strike a hollow note” January 6.

And, while these regulatory discrimination against medium and small businesses, entrepreneurs and start ups remain in force, then Italy, instead of becoming more like Germany in order to prosper, as Wolfgang Münchau proposes in “What eurocrisis watchers should look for in 2014”, would do well becoming even more Italy and run into the shadows of its economía, finanza e banca sommersa.

The survival of Spain and Italy (and Portugal) is day by day being more in the hands of their respective shadow economies, their respective economia sommersa

Sir, no matter where you look in the developed world, you will find dangerous obese bank exposures to what was or still is officially perceived as absolutely not risky, like what was or is triple-A rated and the “infallible” sovereigns; and for the society equally dangerous, anorexic bank exposures to what is officially perceived as risky, like small businesses and entrepreneurs. Nevertheless the bank regulators insist on discriminating against ex-ante perceived risks. 

In this respect, when Robert Zoellick in “Europe is distracted by endless talk of firewalls” April 17, writes that “the survival of the eurozone now depends on Italy and Spain”, but, instead of trying to figure out how their private banks could help out, he recommends a minor capital injection in the European Investment Bank, I can´t help but to feel that the real survival of Italy and Spain (and Portugal) will, in its turn, depend on what the Italians and Spaniards (and Portuguese) can manage to do in their more real and less distorted shadow economies... their respective economia sommersa.

PS. That is specially so when in the official economy regulators apply perceived credit risk weighted bank capital requirements, which so much favors the access to credit of the sovereign over that of entrepreneurs and SMEs.