Flaws in weaving

Very often weavers intentionally add a flaw to their work as a sign of humility; they recognize only God as perfect and do not wish to appear vain or to be the target of envy. The Maastricht Treaty however goes too far in this. It includes a flaw in the proposed solution for the support of the Euro, which denies both the fundamentals of short and long term funding as well as the potential for local manipulation.

The Euro area consists of 17 Member states, each having their own cultural habits, climate, level of prosperity and economic development. The first flaw in this weave is the presumption that the average European actually exists. Indeed a single interest rate in the Euro area is not favorable for the economic development and competitive edge of the area, nor for the individual Member states or for the Euro area as a whole. It eliminates the influence of those local forces that are necessary to accelerate or restrain local developments. The second flaw in weave is the fact that Member states may borrow from the Capital markets and not from the ECB. The third flaw is the ability for banks in the Euro area to lend money to other banks in the area.

Heterogeneity

What is the reason for existence of the Euro area? The creation of a single-currency economic zone. Fair enough. But lending money to the weaker economies at the same interest rate which the ECB applies to the stronger Member states, appears to be an anti-market mechanism. The consequences are dramatic and we must regain control. How? The first condition is that Member states can only borrow money from the ECB and no longer from the Capital markets. In order to fund these loans, the ECB will issue Eurobonds. Let’s call them ‘OK-Euro Golden Bonds’ while distinguishing four risk classes: AAA, AA, A and BBB.

Differentiation

Each Member state in the Euro area can only borrow money from the ECB in accordance with its borrowing capacity, which depends on its level of public debt (public debt versus GNP). We distinguish four tiers, inspired by the organic Fibonacci-sequence: the first level applies to Member states having a public debt ratio of maximum 61.8%, the second level of 85.4%, the third level of 100% and the fourth level more than 100%. Obviously for every level a different interest rate must apply. Let’s assume that the first level group can borrow against Euribor, actually 1%. Still inspired by the Fibonacci-principle the following interest rates apply: the second level at 6.18%, the third level at 8.54% and the fourth level with a minimum rate of 10%. This can be analyzed as follows:

I wonder how this table will look when it is applied to the 2013 budgets.

Impact

Abandoning the single interest rate weave, more realistic interest rates will now be as follows:

Summary

• Banks should only be allowed to lend money either directly to the private sector or to local governments and otherwise only to the ECB, in such case being compensated at the AAA interest rate.
• Member states pay their interest rates to the ECB in accordance with the above mentioned tiers of the debt-GNP ratio.
• Both the ECB and all Member states should will thus have the opportunity to accelerate or to restrain local developments.
• The related funding can be obtained via the above BBB-bonds at the interest rate, now indicated as =<10%, however this percentage can be modified in accordance with the ECB.

The proposed system is flexible, robust and transparent. It respects the solidarity of the Euro area and adjusts the flaws in the Maastricht weaving.

The tables can be obtained in Excel via www.ok-ratinginstitute.eu.

The OK-Rating Institute is the first BENELUX rating agency established in 2003 in Capelle aan den IJssel in the Netherlands.

W.D. Okkerse CEO

OK-Rating Institute

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2908 LW Capelle aan den Ijssel

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