Regular readers know this is true and that the sovereign debt crisis will remain far from over so long as the Germans continue to pursue and insist that the rest of the eurozone pursues the Japanese Model for handling a bank solvency led financial crisis.
Until such time as the banks do what they are designed to do and recognize all the losses on the excess debt in the financial system, the eurozone sovereign debt crisis will not end.
Modern banks, like those in the eurozone, are designed to continue operating with low or negative book capital levels because of the combination of deposit insurance and access to central bank funding. With deposit insurance, the taxpayers become the silent equity partner when the bank has low or negative book capital levels.
The euro zone sovereign debt crisis is far from over even though reform measures designed to address the roots of the problem are beginning to bear fruit, German Chancellor Angela Merkel has said in her New Year's address.Actually, the eurozone has yet to adopt a reform measure that addresses the roots of the problem. The roots of the problem are opacity in the financial system and the related inability of market participants to figure out what is going on.
In a taped interview to be broadcast on Monday evening, Merkel urged Germans to be more patient even though the euro zone crisis has already dragged on for three years.The Japanese have been patient for 2+ decades and have yet to see a positive result from pursuing the Japanese Model and protecting bank book capital levels and banker bonuses at all costs.
Perhaps it is not patience that is required, but rather a new approach.
Fortunately, there is another approach that has been successful at dealing with bank solvency led financial crises: the Swedish Model.
Under the Swedish Model, banks are required to recognize upfront the losses on the excess debt in the financial system. By not placing the burden of servicing this excess debt on the real economy, the Swedish Model protects the real economy and the social contract.
She drew a line linking German prosperity to a prosperous European Union.Yes, they have plunged Greece and Spain into a depression. All the other eurozone countries that are adopting austerity are also seeing their recessions worsen.
"For our prosperity and our solidarity we need to strike the right balance," Merkel said. "The European sovereign debt crisis shows how important this balance is.
"The reforms that we've introduced are beginning to have an impact," she said.
"Nevertheless we need to have further continued patience. The crisis is far from over."
Merkel indirectly contradicted Finance Minister Wolfgang Schaeuble with those comments. In an interview on Friday in Bild newspaper Schaeuble said the worst of the crisis was over....Mr. Schaeuble's comments were made after it was disclose by Der Spiegel that his ministry is looking at how to impose austerity on Germany as its tax revenue drops as a result of the deepening recession in the rest of the eurozone brought on by Germany's insistence on imposing the Japanese Model.