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 24.
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 has capitulated handing over its Remain, the EU would break up?
@PerKurowski
Source:
http://teawithft.blogspot.com/2018/10/is-italys-0-risk-weighted-sovereign.html
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