"Our standard of living is at stake"The chief economist of Deutsche Bank, David Folkerts-Landau, sees the European economy into a downward spiral. Europe must tackle the problems now extremely fast, otherwise threatening an accident.
http://www.welt.de/wirtschaft/article156982813/Unser-Lebensstandard-steht-auf-dem-Spiel.html
(link in german)
Google Translation
He is one of the most influential economists of Germany and one of the most pessimistic. David Folkerts-Landau, the chief economist of Deutsche Bank, Europe is on the brink.
The World: Mr. Folkerts-Landau, what you prepare bigger worry: the state of the Italian banks or of your own home?
David Folkerts-Landau: There currently is not about individual banks, the whole sector is under pressure. Across Europe have fallen by around 50 percent since the beginning of bank shares. This has huge implications, because the financial industry is now in a different way than the cement industry: If a player fails, this is for the other no advantage - instead gets the entire system under stress.
The world: Despite being German bank fallen considerably.
Folkerts-Landau: For the German Bank I am optimistic. You can already tell that I have recently purchased 100,000 shares of our house. But of course the environment is difficult.
The World:Your analysis is full of gloomy scenarios . Feel comfortable as doom prophet Europe?
Folkerts-Landau: I'm not a doom prophet, but a realist. Europe is seriously ill and needs to address very quickly the existing problems, or face an accident. The decline in bank stocks is only the symptom of a much larger problem. Europe suffers from weak growth, we are a dangerous deflation close, while the States have large debts.
The World: And that despite historically low interest rates and the money printing program of the European Central Bank.
Folkerts-Landau: If someone now come back to earth after a multi-year trip to Mars, he would be surprised how little action has unfolded the expansionary monetary policy. As long as the economy is growing so extremely slow, the bank issue will not go away.
Do not get me wrong, I do not expect second financial crisis as in 2008. The banks are today because despite everything more stable, they have at least the significantly more equity. We are facing this time rather a slow, long-term downward spiral. In Europe, the institutions are sitting on bad loans of two trillion euros.
Penalty interest of the ECB burden the financial industry, and the low share prices make it very difficult to get fresh capital in the market. We are experiencing crises at ever shorter intervals. And I can not see where growth is to come from the best intentions.
The World:Especially in Italy the Martians would come to ponder ...
Folkerts-Landau: Italy requires certain special attention. The debt of the country already add up to 135 percent of economic output. However, the government writes a deficit of three percent, while the country but grows only about one percent. The debt ratio will therefore continue to rise. Banks are weakened, and the constitutional referendum in autumn brings moreover political uncertainty.
The World: Sounds like doom.
Folkerts-Landau:The Italian Institute have non-performing loans of 350 billion euros are in their books. But which is expected to be the lower limit. In the zero interest rate environment, it is easier simply to request loans continue without eradication. This may represent the scope of the problems. In this respect the public kolportierte capital requirement of EUR 40 billion is expected to be even calculated conservatively. One thing is clear: the banks need to be recapitalized.
The world: But for that of the States nachschießen much money. The new EU banking Directive forbids.
Folkerts-Landau:The new directive allows for some flexibility. So may States provide capital to banks under certain conditions and for a very limited period.
The World: With such tricks you will be the banks can save little.
Folkerts-Landau:It will have no choice but to launch a major program to recapitalize banks. America has successfully fooled the of 2008. At that time, the institutes was even forced the money. And at the end of the state made with the help a tidy profit. In Europe, the program must not be so great. With 150 billion euros can recapitalize European banks.
The World: A European Tarp but would torpedo the Banking Directive.
Folkerts-Landau:The law requires that first emerged the private owners and creditors for eight percent of the payment obligations before the state is allowed to substitute. The only problem is: That is just in Italy politically implement.
The World: Why?
Folkerts-Landau:Many private savers have taken in the face of low interest money from the checking account and thus bought bank bonds. These customers would now lose some of their money. In addition, you risk then elsewhere a rush of creditors and customers of the banks. Strictly adhere to the rules would cause greater harm than they suspend.
The world:When subjecting the bank policy, then it is in fact dead.
Folkerts-Landau:I think the European Resolution Directive for banks well. It provides discipline. But Europe has these stringent bank rules introduced at the worst possible time - even before the industry was able to stabilize. They would lead the banks and thus Europe in the crisis to implement now.
The World: Europe has seen such never the right time for stricter rules or reforms.
Folkerts-Landau:Of course, there is the risk that the settlement policy will not permanently enters into force. Europe is not just exemplary in implementing rules. Nevertheless, European governments need to take this risk. The banking system ruin would be significantly more risky.
The World:The ECB provides but with a lot of money that it does not come to destruction.
Folkerts-Landau:The ECB could with attractive long-term loans for banks to improve the conditions. In addition, they should cease to affected healthy banks with negative deposit rates. But the problem of weak balance sheets, they can not solve. Especially as the monetary authorities anyway much to do too much.
Die Welt: What do you mean?
Folkerts-Landau: The ECB has committed a cardinal error with its promise to buy in doubt indefinitely bonds of crisis countries. This could go down as one of the biggest mistakes of a central bank in history.
Through the promise and the subsequent purchase program, interest rates were kept artificially low for the crisis countries. But that assumes the governments of any incentive to seek reforms or economic discipline. This also explains why many countries now suffer from a record debt.
The World:Then Mario Draghi bears the greatest guilt, especially under his tenure at the Bank of Italy between 2006 and 2011 private banks the bad loans have piled up?
Folkerts-Landau:It is not about blame. The problems have many fathers. When at the beginning of the millennium exploding debt levels, also Germany has failed to comply with the Stability Pact, and no one has called stop. And now once more an exception for France made, and no one has really opposed. All this wrangling in Europe has led to the fact that the British now voted for the exit.
The world:Can not prevent at least the Proposed referendum on United Kingdom membership of the European Union ?
Folkerts-Landau:It is decided and implemented. I wonder about German commentators who dream to reverse the decision. This is wishful thinking. We will have to find a way to EU and Britain cooperate.
The world then exaggerates the head of the International Monetary Fund, Christine Lagarde, when she now compares the situation with that of 1914, shortly before the First World War?
Folkerts-Landau: History does not repeat itself. The Western elite must however be accused of not having sufficiently explained the value of globalization and not spread their fruit evenly. Billion people were lifted out of poverty, we can buy a TV for a tenth of the previous price. However, the downside is that the middle class has partially suffered from globalization. Many industrial jobs have disappeared.
To make matters worse, the monetary policy has inequality exacerbated: Only those who have stocks or real estate, benefited when a central bank buys assets, the normal small savers on the other hand suffers from the low interest rates. This has made many people unhappy and paved the way for populism.
Die Welt:What is your master plan to save Europe?
Folkerts-Landau: First, the banks need to be recapitalized, in a next step, the ECB has to abolish its penalty interest and to return to a more normal monetary policy again. And of course, reforms are necessary. This will be painful, but no pain, it does not go.
The world need more professionals like you at the helm?
Folkerts-Landau: I am a mathematician and economist, not a politician. But I'm passionate Europeans. I want my three small children grow up in a prosperous Europe. We have no time to lose. Europe has a very fragmented society, it threatens populist movements to come to power. And ultimately our standard of living is at stake.
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