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

Martin Wolf has forfeited his right to preach on budgets, public debt limits and the growth of the real economy

Sir, the whole Western World is flirting with self-destruction as a consequence of having accepted capital requirements for banks based on ex ante perceived risk. These only guarantee dangerous excessive bank exposures to “The Infallible”, like sovereigns, housing and the AAAristocracy; and equally dangerously small exposures to “The Risky”, like to medium and small businesses, entrepreneurs and startups.

Much of the problems of the huge public debt overhang in the USA, and in Europe, are a direct consequence of these regulations. 

I have written, and corresponded on many occasions about this with Martin Wolf. But, since he has deemed it fit to ignore the argument of how these capital requirements distort the allocation of bank credit, I at least feel he has forfeited any right to preach on budgets, public debt limits and the growth of the real economy, like he does in “America flirts with self-destruction”, October 2.

I am not that convinced about the health reform in the USA, since I believe it tackles insufficiently the root problem of excessive costs. Even so I would much rather prefer that the actual line drawn in the sand for any budgetary and debt limit agreement, was the total elimination on any discrimination based on perceived risks; something that should in fact already be prohibited because of the Equal Credit Opportunity Act (Regulation B)

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, since he understands it all… at least so he thinks. For instance I believe Wolf does not understand how subsidized sovereign debt is by these regulations and so in fact, the current public debt level, is considerably higher in real terms. Perhaps Wolf could benefit from reading Jens Weidmann's "Stop encouraging banks to load up on state debt" of October 1.

The confidence in the dollar and USA’s defense capabilities are as connected as they can be

Sir, when Sebastian Mallaby in “American power requires economic sacrifice”, July 7 discusses USA’s spending on defense he fails to mention one important related question namely… how much of the world’s clearly extreme confidence in the US dollar depends on the US conserving at least the appearance of omnipotence? My answer would be “much much more than what you think… this is really terrain where realpolitik reigns”. 

In this respect any defense savings that comes, for instance, from not fighting useless wars will be acceptable, but any saving that leads to a perception of a lessened military readiness of USA would become extremely expensive, as a result of the dollar being worth less, or the markets demanding higher interest rates to hold US public debt.

Let us now pray this was the last waking up from a wish-dream for a while

Sir Martin Wolf rightly calls out the fact that “The world wakes from the wish-dream of decoupling” October 22, although, sincerely, I have yet to meet anyone that was not long in emerging markets that really believed in that.

But when Martin Wolf, sounding a bit like a financial policy macho-man, says “this requires Keynesian remedies. Budget deficits will end up at levels previously considered unimaginable. So be it.” we must now pray for not having to wake up from another wish-dream where budget deficits were decoupled from the lack of confidence in currencies and the consequential inflation.

I would be much more comfortable recognizing that there are some real limits to budget deficits and thereby force the need to assign priorities intelligently to what can be done.

In doing so, I would absolutely agree with Martin Wolf that one of the first things to be done has to be “enhanced procedures for restructuring debts of bankrupt households” since the only way we could be sure of that what in that area is being done is sufficient, is that whatever remains in the mortgages duly merit the triple-A rates previously wrongfully awarded.