Tue Jul 14th, 2009 at 03:08:52 AM EST
[Ed note: first posted Wednesday, 1 July]
Having taken a look at Wolfgang Münchau's latest scribblings, it really seems Europe is doomed. Some excerpts below.
Eurozone banking needs a co-ordinated strategy
Published: April 26
The most shocking news from last week's excellent Global Financial Stability Report from the International Monetary Fund was not the headline estimate of total bad assets. That number stands at $4,100bn (£2,800bn, 3,000bn) and will almost certainly be revised upwards. Much more shocking was that the lion's share of these assets belong to European, not North American, banks. Of the total $4,100bn, the global banking system accounts for $2,800bn. Of that, a little over half - $1,426bn - is sitting in European banks, while US banks account for only $1,050bn.
Even worse, European banks have written down much less than American ones. According to Reuters, the US and European banking and insurance sector has so far written down $740bn. More than 70 per cent of the write-downs come from the US. The eurozone's share has been an appalling 14 per cent.
I suspect that this ugly drama will play out the full five acts, in classic European style. And we are not even halfway through. Not even close.
Message: European banks are even more screwed than US banks.
Diary rescue by afew
Europe must learn from Japan's experience
Published: May 3
Otto von Bismarck said only fools would learn from their own mistakes, while he preferred to learn from the mistakes of others. We are mostly fools.
Süddeutsche Zeitung, the German newspaper, recently revealed an internal memo from Bafin, the country's banking regulator, showing the estimated scale of write-offs would be more than 800bn ($1,061bn, £712bn), about a third of Germany's annual gross domestic product. By comparison, the entire capital and reserves of its monetary and financial institutions were only 441.5bn in February. If the leaked number is true, it would mean the German financial system is broke.
All this leaves Europe with a policy mix only slightly better than Japan's in the 1990s. Yet, Europe faces an additional problem. While Japan had its crisis when the rest of the world was booming, Europe has no such luck. I see nothing in our situation or our policy response to persuade me that it will take less than a decade to get out of this.
Message: Europe is doomed, and will have an even worse decade than the Japanese lost decade.
Like a fish, Europe is rotting from the head
Published: May 10
There is a saying that the fish rots from the head, and this is exactly what has been happening here. There is nothing in European politics that stinks more than the apparent inevitability of another five-year term for José Manuel Barroso, the Portuguese president of the Commission. He spent most of the last few years on his bid for re-election rather than doing his job. If the centre-right wins the elections to the European parliament, as everybody seems to expect, nothing can stop Mr Barroso's bandwagon.
So it is not quite game, set and match yet but it is as close as it could get at this stage. This is all very depressing. Mr Schmidt is right about the ECB. Indeed the central bank made a number of good decisions last week, when it delivered a robust policy response to the crisis.
But I never thought that we would ever celebrate a central bank as the only political institution that really works in Europe. How did we get there?
Message: Europe has a worthless leader, and he will do nothing or create disasters.
Germany needs more than an accounting trick
Published: May 17
After the US, the country with the biggest banking problem is probably Germany. Last week the German cabinet adopted a bank rescue plan worth looking at in detail. If you want to know how long the European crisis will last, this might give you the answer.
Will it work?
The answer is: not in the way that has been proposed. First of all, the plan is a giant accounting trick. Under fair-value accounting, it could not possibly work because the bank would have to make a provision for future losses of the SPV. This would, of course, defeat the very purpose of the plan. It is constructed in the same spirit as some of the more eccentric debt securities.
The more I think about it, the more I am reminded of Japan. But this might be unfair to the Japanese. They solved the problem eventually. If we freeze our toxic securities for 20 years, a Japanese-style lost decade will soon come to be regarded as the optimistic scenario.
Message: Europe is worse off than the US and it is worse than Japan, and Europeans are still in denial of the fact that there is even a problem.
Timing is everything
Published: June 2
Ms Merkel, who has persistently underestimated the extent of this crisis, has reached the inevitable point where complacency gives way to panic. She is presiding over one of the world's sickest banking sectors. German economic growth will shrink by some 5-6 per cent of gross domestic product this year. And even now, Germany's policy establishment is frightened about rising budget deficits and inflation.
On a recent visit to Berlin, I heard everyone talking about fiscal exit strategies as early as this autumn. Policymakers are visibly panicking over the relatively small increase in the budget deficit. Judging by her comments, Ms Merkel is a fully paid-up subscriber of those who blame the infidel, inflation-loving, Anglo-Saxon monetary economy establishment for everything that has gone wrong.
The woman who has championed the "chacun pour soi" approach to economic crisis management, tells the world that she is now open to global macroeconomic policy co-ordination, as long as it serves her narrow domestic interests. The approach lacks credibility. I guess the most likely scenario now is for a period of damaging transatlantic policy divergence.
Message: Europe, led by an irrational Germany, is panicking and flailing uselessly, damaging both itself and the world.
Down and out for the long term in Germany
Published: June 7
Let me attempt, perhaps foolhardily, to map out a scenario of how the global economic crisis could evolve in continental Europe.
Even if we assume a recovery elsewhere, Europe's economy may be stuck at low growth for some time. To understand why, it is perhaps best to look at sectoral balances for households, companies and the public sector.
If my predictions prove correct, Germany will be down and out for a long time with a huge and still unresolved banking crisis, an overshooting exchange rate and lower net exports, presided over by politicians who panic about domestic inflation. This will not end well.
Message: Germany (and Europe) is doooooomed!
Optimism is not enough for a global recovery
Published: June 14
As the recession continues, the number of personal and corporate insolvencies will rise, which in turn will aggravate the problems of the banking sector. I am not surprised that the Bundesbank's Mr Weber resists the publication of stress tests for the banking system. It would show that the German banking system was insolvent - and that bad and potentially bad assets were equivalent to about one-third of gross domestic product.
The only potentially good news in the past three months has been the receding threat of a currency crisis in central and eastern Europe. But I am not even sure that this is for real. The persistent refusal by eurozone policymakers to concede fast-track euro accession for central and eastern member states could yet prove destabilising.
Last week, the ECB had to provide 3bn in euro liquidity to Sweden's Riksbank, in the absence of which Sweden may have experienced its second banking meltdown in less than two decades. The inevitable collapse of Latvia will have ripple effects on the Baltic region and may cause panic among investors in other central and east European countries.
Message: The economy is really bad, there is no such thing as green shoots (we knew that already), all German banks are bust, Swedish banks are bust(! weird that no one noticed that thing back here), the EU is irrationally denying the euro to central and eastern Europe.
Berlin weaves a deficit hair-shirt for us all
Published: June 21
A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe's stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.
I can foresee two outcomes. First, Germany might end up in a procyclical downward spiral of debt reduction and low growth. In that case, the constitutionally prescribed pursuit of a balanced budget would require ever greater budgetary cuts to compensate for a loss of tax revenues.
Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case, the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case, economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany's lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.
While the balanced budget law is economically illiterate, it is also universally popular. Average Germans do not primarily regard debt in terms of its economic meaning, but as a moral issue. Der Spiegel, the German news magazine, had an intriguing report last week on the country's young generation. One of the protagonists in its story was a young woman who had borrowed a little money to set up her own company. The company turned out to be a success, and she had began to repay the loan. And yet she said she had not felt proud of having taken on debt.
This general level of debt-aversion is bizarre. Many ordinary Germans regard debt as morally objectionable, even if it is put to proper use. They see the financial crisis primarily as a moral crisis of Anglo-Saxon capitalism. The balanced budget constitutional law is therefore not about economics. It is a moral crusade, and it is the last thing, Germany, the eurozone and the world need right now.
Message: The Germans are really fucking irrational and still run on a toxic mix of protestantism and fear of shadows from the 30's. This will either fuck up Germany for a generation or break the Eurozone.
Germany and France need to sing in tune
Published: June 28
I never expected a message of austerity to emerge from the Palace of Versailles, where Nicolas Sarkozy, France's president, spoke last week to outline his economic strategy for the rest of his term. He left no doubt that he is not prepared to follow Angela Merkel, Germany's chancellor, in the direction of a balanced budget. Instead, he distinguished between "good" and "bad" government deficits, went on to explain that a good deficit is cyclical, a bad deficit structural, and then produced yet another category: a temporary deficit that would be brought down through higher economic growth in the future.
In fact, it could prove highly destabilising to the eurozone. Germany, as I argued last week, is heading in the direction of a zero level of government debt in the long run as a consequence of a new constitutional balanced-budget law. It is perhaps not intuitive that a balanced budget, pursued indefinitely, would eventually lead to a complete eradication of public debt. But this is what will happen.
They will not repeat the same mistake, but they will still be facing a problem. If Germany's national debt converges towards zero, Germany's surplus savers will have to invest huge amounts of their savings outside the country, since the supply of German government bonds will diminish over time as the outstanding stock of debt is depleted.
Now this is where Mr Sarkozy's bad deficits come in. Most German savers, especially pension funds, will want to invest in euro-denominated government debt, which, for practical purposes in this scenario, means French debt, because no other domestic European bond market is sufficiently large and mature. As a result France may enjoy a version of America's exorbitant privilege.
For the sustainability of the euro, you surely do not want to get into a position where a large member state has a rational economic reason to quit. So if Germany and France really do what they both promise, you may as well start the egg timer.
Message: The German protestant-idiots will send all their savings to France, become impoverished and bring down the Euro.
I might add that I have not cherrypicked the articles. These are all his recent articles, bar one. Do we find a common theme? Are things really as bad as Münchau makes them out to be, and is Europe really in a uniquely bad situation? Or is Münchau for some reason somewhat slanted?