German government sounds ever more desperate

Steinbrück’s (futile) threat to force banks to loan money shows the desperation about the export-dependent German economy. Add to this the push and shoves between Germany and France, in short the dilemma that Europe is, and you have all the ingredients to have Japanese-style stagnation for years to come.

The Europeans have a bigger task and they operate in a more difficult political environment. The economic policy framework of Europe’s monetary union only barely succeeded during a normal economic cycle, during which its most important framework of policy co-ordination, the stability and growth pact, was dislodged. The policy framework proved utterly dysfunctional during this economic crisis, as leaders like Angela Merkel or Nicolas Sarkozy have resorted to their nationalist instincts. It would take an even bigger crisis for them to agree on a joint resolution strategy for the banking system.

America will get out of this first for various reasons. One of them letting the dollar fall against the Euro. This will will hurt especially the German export industry.

I would expect the US to have something approaching a genuine recovery at some point in the next decade, but probably not in 2010 or 2011. Judging by the co-ordination failure at the level of the European Union, the persistent failure to deal with the continent’s 40 or so cross-border banks at European level, and in particular Germany’s inability to sort out its toxic-asset contaminated Landesbanken, the economic prospects for the eurozone are infinitely worse.

Blaming the German banks of not lending is nonsense; it rather shows that banks do not believe in lending to companies they do not deem creditworthy. Keeping dead companies alive as Germany tries to do will only harden the banks stance.

The problem is that the trillions of dollars and euros in liquidity are not getting through. There is no point in blaming the banks. Mr Trichet appealed to the banks to behave responsibly. Over the weekend, German politicians also made desperate and implausible threats against the banks unless they increased lending. Not only is this a waste of time but the banks are, in fact, behaving responsibly when they deny credit to customers whom they judge to have lost creditworthiness.

Germany needs to come clean with the true situation of its banks which clearly have a lot of shit on their books.

Liquidity injections by a central bank, however large, cannot restore health to the banking sector in a sufficiently short period of time if the underlying problem is lack of solvency. Nor do accounting tricks that allow banks to freeze their bad assets in bad banks without any resolution mechanism, such as the German law passed last week. And since the European economies are far more dependent on the banking sector than their Anglo-Saxon counterparts, the need to sort out the banking sector is even more urgent there.

Full Münchau article here