Is there reason for optimism about the Eurozone?

I like to think that there is reason for optimism about the Eurozone and its eventually addressing the solvency crisis.

My optimism is rooted in the simple fact that it is becoming exponentially harder for Eurozone policymakers and financial regulators to adopt policies that kick the solvency problem into the future.  This is a very good thing.

As this blog previously stated and Japan has definitively shown, the cover-up of the solvency problem in the financial system makes the situation much worse than acknowledging and dealing with the solvency problem.

Not only has it become exponentially harder to kick the solvency problem into the future, but the German government continues to move towards forcing the Eurozone to come clean about its solvency problem.

Its tool for achieving this is forcing austerity onto countries.  It is the countries that are facing austerity that will lead the recognition of the solvency problem.

Countries being forced into austerity face a simple choice: depression for their citizenry or inflict massive losses on the Eurozone banking system which was designed to be a safety valve and absorb these losses so as to protect the real economy from the damages of financial excess.

It is a question of time before the Spanish, Italian and Greek governments decide that French and German banks being forced to recognize their losses on their sovereign debt exposures is not nearly as bad an outcome as forcing a depression on their citizenry.

My expectation is that Italy and Greece will come to this decision sooner than Spain.  These countries currently have unelected technocrats running their governments.  Since they are unelected, these governments do not have popular support.

Frankly, the citizenry will rapidly figure out that they can vote both the technocrats and austerity/depression out of office and vote into office banks absorbing losses and economic expansion.  It really is not a hard choice for the citizens to make.

It is a question of time before everyone realizes that the Eurozone banks can continue to operate and provide loans and payment services while having negative book equity.  Remember, no one thinks they are solvent now because of their exposures to troubled assets.  Confirming this fact is not going to undermine depositor confidence!

I realize that bankers like to whisper fears of contagion into policymakers' ears, but ultimately these fears are nothing more than a bluff to keep the gravy train of bailouts and bonuses going.

A bluff that is easily ended by simply requiring banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  Remember, banks routinely made this type of disclosure before the days of deposit guarantees as it was a sign of a bank that could stand on its own two feet.