Giving Out

Some earn, some lose. Irish numbers are bad, but Cypriot ones are even worse. Catalonian secession.

E-cigarettes. They do not smell, they do not create any mess, like ashes and butts; in comparison with normal cigarettes, they have a minimal health impact, and a drunken guy sitting next to you in a bar cannot burn your eye out with an e-cigarette – thus, they should be banned! In Brussels, an agreement on e-cigarettes has been accepted. Under its provisions, e-cigarettes will be banned in the whole EU if three European countries ban them.

In the UK, one rural family probably knows how they are going to vote in the upcoming referendum on British withdrawal from the EU. Following European regulations, they have been forced to leave their family farm, which was supposed to be inherited by their children. Their land is going to be flooded because of an expansion of neighboring breeding bird colony.

Plik Escudo de Cataluña.svg znajduje się w Wikimedia Commons – repozytorium wolnych zasobów.

Brussels takes away, but Brussels also gives. For example, Greece is going to receive 3 billion euros for highway construction projects. It is of no consequence that nobody will use the highways because of a rapid decrease in traffic or that Greece has a population twice as large as Slovakia, but its highway network is 8 times longer compared to the Slovak one. Moreover, a bankrupted country could use the money in a better way. But on the other hand, if Spain has the biggest highway network in Europe, Greeks should be allowed to show off as well…

Spain helps its football clubs with its heart and soul. Besides transfers of real estate to football clubs below market prices (we know the scenario very well in Slovakia, don’t we?), the Spanish government has lent them approximately 120 million euros. Therefore, when watching Champions League, you should enjoy it as your own – Ronaldo’s 30-million annual income is guaranteed through the ESM also by us.

Railroads receive European money as well. The program “Shift2Rail” has gained 1 billion euros thanks to the initiative of the Commission (to compare: the same amount is annually used for medication in Slovakia). Most European railways have already been massively subsidized by national governments, but Brussels still thinks they are underused. This program is meant to change it.

The Central African Republic is going to receive 18.5 million euros of aid. Apart from the money, they will also be aided by French troops, which plan to suppress Islamic fundamentalists in this former French colony. The French president François Hollande is not in favor of having it all paid by French budget money, thus he is calling for a formation of a mutual European fund. Maybe your grandma living in a small village will soon be financing French machine gunner in Bangui suburb. And because Brussels cares about the happiness of everybody on this planet, it promised to buy happiness by “unprecedented support” also to Israel and Palestine, if they manage to reach an agreement.

However, the “giving” is the most generous in the banking sector. European banks have received 500 billion euros in bailouts (information on the current financial status of the “saved” banks can be accessed here) and another 1 trillion of very low interest rate loans from the ECB. This has allowed banks to keep earning by a simple carry trade – borrowing cheap money from ECB and buying government bonds with higher interest rates. We can see this strategy if we take a look into banks’ portfolios. In the last couple of years, the volume of investments in bonds is rising. Everybody is happy – banks are profiting and governments have sources to spend (or waste). Unfortunately, the perpetual motion machine does not exist, especially not a financial one.

The European banking system still has feet made of clay. Even though Ireland has already left the rescue program, the ratio of toxic credits in Irish banks is still as high as 26.6%. In Cyprus, it reaches even 48%. In contrast, in healthy banking systems, this value is approximately 5%; in Spain it is 12%.

The proposed banking union is meant to handle future bank falls. The concept of the union is becoming clearer. Rules of handling failed banks and a common resolution fund have already been negotiated by the Council and are now waiting for an approval by the Parliament.

According to the plan, in next 10 years, banks are going to collect 55 billion euros (eventually more) for the resolution fund. In case of a bank bankruptcy, the Cypriot scenario will repeat itself – it will be the shareholders as well large depositors of banks that will be financially responsible. On the one hand, mutual surety will strengthen the banking system; on the other hand, it will not solve the main problem. If healthy banks are forced to help the irresponsible ones, how will they be motivated to make good business decisions? Furthermore, Mario Draghi, Michal Noonan, and others are pointing out the low capacity of the resolution fund and overcomplicated decision-making. Everybody wanted to keep their right of veto, thus fund decisions need to be made by 2/3 of Members with 50% fund share and approved by the European Council, the Commission and the Resolution Fund Council. The agreement on the establishment of the banking union also includes a politically sensitive issue of sick bank recapitalization. This is planned to be allowed following next year’s stress-test.

After three years of negotiations, there is some progress in the question of the third pillar of the banking union – the common deposit guarantee fund. At the beginning of 2014, rules for national funds are going to be unified and the funds will be composed of 0.8% of deposit volume.

However, there is still something missing, namely a higher personal responsibility. The trial in Iceland, where a local bank CEO was sentenced to five years in jail can serve as a model. As you could see a couple of paragraphs above, the problem lies in banks buying government bonds and helping politicians finance their promises.

The Catalonian president has unilaterally declared the date of an independence referendum – November 9, 2014. The Spanish prime minister Mariano Rajoy, supported by the EU president Herman Van Rompuy, has immediately declared that there will not be any referendum. Independence and democratic decision-making are relevant arguments only when talking about the third world, but in Europe Brussels wants to have everything centralized and bureaucratized. Secession could be quite a dangerous complication for politicians…

May you all stay together, at least during Christmas. And together watch our PF 2014 video.

Translated by Roman Ujbányai