ECB says Europe faces Japanese style lost decade if banks not fixed

Reuters reports that according to the ECB, Europe faces a Japanese style lost decade if banks not fixed.

Regular readers know that your humble blogger said this almost six years ago when the EU, UK and US adopted the Japanese Model for handling a bank solvency led financial crisis.

It is nice to see with four years left to go in the decade, the ECB agrees and has produced a study the confirms all of observations about the failings of the Japanese Model that I have made.

Decision makers should move quickly to repair the euro zone's ailing banking system to avert a Japanese-style lost decade of minimal growth and inflation, a European Central Bank study said on Thursday. 

"The risk is the emergence of a situation of the type experienced in Japan during its 'lost decade'," the study said. 

"Fragile banks have an incentive to continue financing troubled and inefficient firms, so as to avoid recognising further losses." 

The unwinding process can become a long-lasting drag on the economy, the research paper said. 

"In this constant balancing act, policy interventions should, therefore, avoid delaying the necessary adjustment process." 

Once banks' balance sheets have been cleaned, corporate defaults might have a much smaller impact on the economy, it said.