Saturday, November 3, 2012

Angela Merkel: eurozone debt crisis to last at least 5 more years

As reported by the Telegraph, German Chancellor Angela Merkel sees the eurozone debt crisis lasting at least another 5 years.

Regular readers know that your humble blogger predicted that the bank solvency led financial crisis would last so long as policy makers and financial regulators continue to pursue the Japanese Model.  Under the Japanese Model, bank book capital levels and banker bonuses are protected at all costs.  The result is to shift the burden of the excess debt onto the real economy.

At best, the real economy experiences a Japan-style slump as capital that is needed for reinvestment and growth is diverted to making payments on the excess debt (see: UK and US).

At worst, the real economy experiences a depression (see: Greece).

Unlike Chancellor Merkel, I know that the financial crisis could be over well inside of 5 years if the Swedish Model were pursued (see: Iceland).

Under the Swedish Model, banks are required to recognize upfront the losses on the excess debt in the financial system.  This preserves the real economy and lets it resume growing as capital is not diverted from reinvestment and growth to debt service.

How long it takes to end the financial crisis is the choice of politicians like Chancellor Merkel.  

They face this choice of abandoning the Japanese Model and pursuing the Swedish Model every day as every day they continue with the Japanese Model the financial crisis does not end.

That the Japanese Model will not end the financial crisis is not surprising as Japan has followed the Japanese Model for 2+ decades and shown that the Japanese Model does not end a bank solvency led financial crisis.

Your humble blogger is optimistic that rather than continue to see social contracts rewritten and societies fall apart the policy makers will decide sooner rather than later to adopt the Swedish Model.

The eurozone will take at least another five years to recover from the crippling debt crisis that has hampered even Europe's most powerful economy, according to German Chancellor Angela Merkel. 
Mrs Merkel said that though Europe was on the right path to overcome the crisis, she added: "Whoever thinks this can be fixed in one or two years is wrong." 
“We need a long breath of five years and more,” she told a conference in Sternberg, Germany. “We need rigor to convince the world it’s worth investing in Europe.”
Mrs. Merkel, I was right when I publicly predicted our current financial crisis.

Mrs. Merkel, I was right when I predicted that the economy would remain in a downward spiral until such time as transparency was brought to all the opaque corners of the global financial system.  The only reason there is any growth in the global financial system today is the massive fiscal and monetary stimulus that is being provided.  Whenever fiscal and monetary stops, so does economic growth.

Mrs. Merkel, I was right when I predicted that the Japanese Model would not end the financial crisis.

Mrs. Merkel, I was right when I predicted that the Swedish Model would end the financial crisis.  Iceland is the only place that has tried it and they are the envy of Ireland, Spain, Portugal, Greece, Italy and France.
Two years ago some heavily indebted European countries were dragged into the turmoil that first gripped global financial markets in 2007. 
Greece in particular has been struggling with the austerity conditions imposed on it by countries such as Germany.
I realize that you are the Chancellor of a country that has banks that made a significant number of bad loans (to individuals, companies and countries).

It is time that your banks recognize their losses on this bad debt.  After all, nobody forced your bankers to make bad loans or investments.  They did so voluntarily.

Banks recognizing losses is vastly better than enforcing austerity conditions as it is banker bonuses that are cut back and not the social safety net.
But Merkel told a regional meeting of her Christian Democratic Party on Saturday that the time had come for "a bit of strictness."
For the banks!
Otherwise, she says, Europe won't be able to attract international investment.
Nobody wants to invest in a region that is contracting because of failed economic policies.
Data on Friday showed that that eurozone's manufacturing sector contracted for the 15th month running in October as output and new orders fell. 
Manufacturers were the driving force behind the bloc's recovery from the last recession, but the downturn in factory activity that began in smaller periphery countries has now engulfed core members Germany and France.... 
"The national data also paint a bleaker picture. The ongoing weakness of the periphery is being combined with hollowing out of the previously strong core of France and Germany."
Regular readers know that I have discussed the hollowing out of France and Germany as the final result from adhering to the Japanese Model.

Mrs. Merkel, the time has come for you to save the German people and the German economy.  The only way to do this is to require the German banks to recognize their losses.

Fortunately, Germany's financial system is designed to let the banks recognize their losses and continue to operate and support the real economy.  The banks can do this because they have both deposit guarantees and access to central bank funding.

With deposit guarantees, the German taxpayers are the banks' silent equity partner while they have low or negative book capital levels.  The German banks can rebuild their book capital levels by retaining 100% of their pre-banker bonus earnings.

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