Tag: european union

Italy’s Renzi Goes Toe-to-Toe with the EU over Italy’s Troubled Banks

Only 17 percent of Italy’s money supply (M3) is accounted for by State money produced by the European Central Bank (ECB). The remaining 87 percent is Bank money produced by commercial banks through deposit creation. So, Italy’s banks are an important contributor to the money supply and, ultimately, the economy.

In anticipation of poor results from the Italian banks’ stress tests (which will be reported on July 29th), Italy’s Prime Minister, Matteo Renzi, has indicated that his government will unilaterally pump billions of euros into Italy’s troubled banks to recapitalize them, so that they can continue to extend credit and contribute to the growth of Italy’s broad money supply. There is a problem with this approach: it is not allowed under new EU rules. These rules require that bank bondholders take losses (a bail-in) before government bailout money can be deployed. But, in Italy, a big chunk of bank debt (bonds) is held by retail investors. These retail investors vote in large numbers. So, the EU bail-in regulation, if invoked, will certainly put Renzi’s neck on the chopping block. And that will come sooner rather than later because the Prime Minister has called for a referendum on Italy’s constitution in October and stated that he’ll resign if the referendum is voted down.

It’s no surprise that Renzi has his eye on banks. It’s also easy to see why he is worried and ready to pull the trigger on a state-sponsored bank bailout. The accompanying chart on non-performing loans should be cause for concern.

To put the non-performing loans into perspective, there is nothing better than the Texas Ratio (TR). The TR is the book value of all non-performing assets divided by equity capital plus loan loss reserves. Only tangible equity capital is included in the denominator. Intangible capital — like goodwill — is excluded.

So, the denominator is the defense against bad loans wiping the bank out, forcing it into insolvency. A TR over 100 percent means that a bank is skating on thin ice. Indeed, if the non-performing loans were written off, a bank with a TR in excess of 100 percent would be wiped out. All of the five big Italian banks in the accompanying table — including the Banca Monte dei Paschi di Siena (BMPS), the world’s oldest bank — fall into this ignominious category.

They need to be recapitalized. This could be done by issuing new shares on the market. But, all these banks’ shares are trading well below their book values. BMPS’ price is only about 10 percent of its book value, and Intesa Sanpaolo (the best of the lot) is only about 66 percent. In consequence, any new shares issued on the market would dilute existing shareholders and be unattractive. This is why an Italian state rescue is the most attractive source for the recapitalization.

What if the United Kingdom Departs the European Union?

Donald Trump’s success in the U.S. is not unique. Europe is being buffeted by similar populist currents.

The United Kingdom might vote to exit the European Union in June. Moreover, a yes victory might spark what John Gillingham of the Harvard Center for European Studies and Cato’s Marian Tupy of the Cato Institute called a “rush for the exits.”

The most important question for UK voters is: Does belonging improve their lives?

European unity originally was designed to expand economic markets. The “European Project” took a dramatic new turn in 1993 with the Maastricht Treaty, which created the European Union and set as a goal “ever-closer union among the peoples of Europe.” This process was enthusiastically endorsed by a Eurocratic elite, many of whom are located in Europe’s quasi-capital of Brussels.

Are the benefits worth the cost? The single market remains the organization’s greatest contribution to Europe. However, regulation increased as Brussels expanded its authority. The London-based group Open Europe figured that the 100 most important EU regulations cost Britons about $33.3 billion annually.

The EU unabashedly infringes national sovereignty. For instance, Nile Gardiner of the Heritage Foundation wrote: “For decades, the British people have had to surrender their right to self-determination and have been forced to endure the humiliation of having British laws being overruled by European courts, and a multitude of rules and regulations imposed by unelected bureaucrats in Brussels.”

The UK government figures about half of economically significant laws originate in EU legislation. Yet London doesn’t need oversight from Brussels, having set the global standard for parliamentary government for much of the world.

Which is why Prime Minister Cameron pressed for broader British exemptions from EU dictates. He won only modest concessions.

At least Brussels still is less Leviathan than is Washington. But some Eurocrats openly pine for a United States of Europe.

Unfortunately, continental government is almost inherently anti-democratic. The EU has been attacked for its “democratic deficit.” Washington suffers a similar problem.

What the American Experience Suggests for Brexit

A few years ago President Barack Obama urged members of the European Union to admit Turkey. Now he wants the United Kingdom to stay in the EU. Even when the U.S. isn’t a member of the club the president has an opinion on who should be included

Should the British people vote for or against the EU? But Britons might learn from America’s experience.

What began as the Common Market was a clear positive for European peoples. It created what the name implied, a large free trade zone, promoting commerce among its members. Unfortunately, however, in recent years the EU has become more concerned about regulating than expanding commerce.

We see much the same process in America. The surge in the regulatory Leviathan has been particularly marked under the Obama administration. Moreover, the EU exacerbated the problem by creating the Euro, which unified monetary systems without a common continental budget. The UK stayed out, but most EU members joined the currency union.

Economics of the Syrian Refugee Crisis

The Syrian Civil War has produced about 5.8 million Syrians seeking refuge or asylum elsewhere–a scale of population displacement unseen since World War II. Although the flow into Europe dominates the news, most of the registered Syrian refugees remain in the Middle East. Lebanon, Turkey, and Jordan are the main recipients of the immigration wave, receiving roughly 1.1 million, 2.7 million, and 640,000 Syrians, respectively. The Gulf States are hosting about 1.2 million Syrians on work visas but they are not legally considered refugees or asylum seekers because those nations are not signatories to the UNHCR commission that created the modern refugee system. Regardless, the humanitarian benefit of Syrians working and residing there is tremendous.

The movement of so many Syrians over such a short period of time should result in significant economic and fiscal effects in their destination countries. Below is a summary of recent economic research on how the Syrians have affected the economies and budgets for Lebanon, Turkey, Jordan, and Europe. 

Lebanon

Syrian refugees are 24 percent of Lebanon’s population–the highest Syrian refugee to population ratio in the world. However, neither the Lebanese government nor the United Nations has established official refugee camps in the country and registration of new Syrian refugees stopped in May 2015. International NGOs provide humanitarian aid that benefits over 126,000 destitute Syrians, but significant funding shortages have left some Syrians living on less than half a dollar per day. To more efficiently provide aid, the United Nations High Commissioner for Refugees has divided the country into four areas: Mount Lebanon and Beirut, North Lebanon, Bekaa Valley, and South Lebanon. Most refugees have settled in the underdeveloped areas of the Bekaa Valley and North Lebanon because the Lebanese in these areas share many family ties with Syrians. Locals in these areas are struggling to accommodate Syrian refugees despite the family ties.

Many Syrians, especially those with more wealth and greater skills, are responding to the poor economic conditions in North Lebanon and Bekaa by moving to South Lebanon and Beirut where there are more job opportunities, higher wages, cheaper rents, and safer communities. Syrian entrepreneurs are also welcomed in these regions of the country.

GMOs and the EU Parliament

The European Union (EU) and its member states have had a difficult time dealing with the politics of genetically modified organisms (GMOs).  Despite the fact that the European Food Safety Authority (EFSA) has determined numerous GMO products to be safe, only one currently is allowed to be planted.  MON 810 corn (maize) resists insects, such as the European corn borer.  Although this type of corn is widely grown around the world, it is planted on only 1.5 percent of the land area devoted to corn production in the EU.  The main reason is a decision by the EU to allow individual member states to forbid the planting of crops that have been enhanced through genetic engineering. Member states now banning the planting of GMOs include Austria, France, Germany, Greece, Hungary, Italy, Luxembourg, and Poland. 

Regardless of the EU’s reluctance to allow GMO crops to be grown, importation of GMO soybeans and soybean meal has been a commercial necessity.  In 2014 the EU consumed the protein equivalent of 36 million metric tons of soybeans for livestock feeding.  Roughly 97 percent of those soybeans were imported.  The three largest soybean producing and exporting countries – the United States, Brazil, and Argentina – each devote more than 90 percent of their plantings to GM varieties.  It simply isn’t possible to buy enough non-GMO soybeans in today’s world to meet the protein needs of the EU livestock sector. 

Apparently it also isn’t possible for the European Commission to achieve agreement among member countries to authorize new GMOs for importation as human food or livestock feed.  Since the regulations for considering GMO applications went into effect in 2003, a qualified majority of member states has never agreed to approve a new food or feed product.  When the outcome among member states is “no opinion,” the decision on whether to allow a product containing GMOs to be imported reverts to the Commission.  Perhaps with some reluctance, the Commission has approved the importation of around 50 genetically modified products. 

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Third Greek Bailout Is Not the Charm

Nearly a month ago Greek voters rejected more economic austerity as a condition of another European bailout. Today Athens is implementing an even more severe austerity program.

Few expect Greece to pay back the hundreds of billions of dollars it owes. Which means another economic crisis is inevitable, with possible Greek exit (“Grexit”) from the Eurozone.

Blame for the ongoing crisis is widely shared. Greece has created one of Europe’s most sclerotic economies. The Eurocrats, an elite including politicians, journalists, businessmen, and academics, determined to create a United States of Europe irrespective of the wishes of European peoples.

European leaders welcomed Athens into the Eurozone in 2001 even though everyone knew the Greek authorities were lying about the health of their economy. Economics was secondary.

Unfortunately, equalizing exchange rates cemented Greece’s lack of international competitiveness. Enjoying an inflated credit rating, Greece borrowed wildly and spent equally promiscuously on consumption.

Greece could have simply defaulted on its debts. However, Paris and Berlin, in particular, wanted to rescue their improvident banks which held Athens’ debt.

Thus, in return for tough loan conditions most of the Greek debt was shifted onto European taxpayers through two bail-outs costing roughly $265 billion. Greece’s economy has suffered, and the leftwing coalition party Syriza won Greece’s January election. Impasse resulted at the end of June as the second bailout expired.

Greece and the Euro Stagger Towards the Brink

Negotiations in Brussels to resolve the Greek fiscal crisis appear deadlocked, with Athens heading toward default. German Chancellor Angela Merkel insisted that Greece make a deal before the markets open Monday. The Eurogroup will meet again tomorrow on the issue.

The European Union was supposed to create a de facto United States of Europe. But after last January’s Greek election it was obvious that the EU does not speak for Greece, or perhaps anyone else other than the Eurocrats, an amalgam of bureaucrats, academics, journalists, businessmen, politicians, and lobbyists who dominate Brussels.

To most EU leaders common people are an impediment. The Eurocrats reflexively intone “more Europe” in answer to every question, but voters increasingly are supporting protest parties, some populist, some worse.

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