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HEARD ON THE STREET: WHAT IS THE MAIN REASON FOR EUROPE’S ECONOMIC FALL? By Shan Saeed

Corruption and productivity; these are the 2 main reasons why Europe is falling apart and going into an abysmal state. According to RAND CORPORATION report [ THINK TANK] dated March 22, 2016, corruption in Europe stands at 1.2 trillion [6% of GDP]. People are running away from Europe. Productivity is down by 20-30% , living standards is down by 15-20%, currency is going down by 21%, unemployment stands at 30-35% on an average, and the EU’s 28 economies are stagnant. European leaders are in a panic and have no policy instrument to spur growth. First it was Greece, next Ireland, then Spain and Portugal, and now Italy is sick. The European Union seems a failed model.

There is an old saying: What’s sauce for the goose is the sauce for the gander. Meaning, if you insist on something for others, you have to be prepared to hold yourself to the same standard.

A version of that is playing out in Europe today. And right now the strongest signal is not coming from Germany — it’s coming from Italy. ITALY IS GOING DOWN. Italian banks are in deep financial distress (as were banks in Cyprus and Greece from 2011 to 2015). This involves the Banca Monte dei Paschi di Sienna (BMP), the world’s oldest bank still in operation, founded in 1472. Monte Paschi’s trouble began in 2007 when it agreed to buy another Italian-based bank, Banca Antonveneta SpA. It offered 9 billion euros in an all-cash deal just as the global financial crisis was unfolding. BMP’s derivatives blew up because they made losing bets on the value of Italy’s government bonds.

The bank has suffered 15 billion euros in losses since 2009 and has seen its stock fall 99%. BMP was the only major bank to fail the European Central Bank’s (ECB) recent stress test. It was required to raise capital as a result. The efforts to raise capital have been led by JP Morgan and a syndicate including Goldman Sachs and some Chinese banks. JP Morgan won out over a rival plan by veteran Italian banker Corrado Passera.

The plan called for selling about 28 billion euros in bad loans and raising 5 billion euros in new capital. But reports suggest that the capital raising effort has not gone according to plan. The deal proved a disaster for Monte Paschi. It damaged its ability to withstand losses following the 2008 crisis. Then investment bankers stepped in and sold Monte Paschi derivatives, contracts that ended up hiding the bank’s surging losses from regulators. These deals only weakened the bank’s shaky finances.

I foresee social unrest in the European streets by the disgruntled populists.

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