German Economist Sees ‘Downward Spiral … Living Standards at Stake’—Merkel and Schaueble Deny Everything

German Chancellor Angela Merkel and her Finance Minister, Wolfgang Schaeuble, remained blind to reality yesterday, issuing ineffectual denials of any problems in the German economy or banking system. But in an interview with the daily Die Welt, David Folkerts-Landau, the chief economist of Deutsche Bank, reiterated his weekend call for an emergency bank bailout in the range of 150 billion euros, insisting that it was not a problem of individual banks but of the EU banking system as a whole. “Our living standards are at stake,” Folkerts-Landau said, and Die Welt headlined the interview that way.

“We are threatened,” he said, not by another 2008 but “rather by a slower, long-term downward spiral. In Europe the lending institutions are sitting on distressed loans of two trillion euros. The European economy is in a downward spiral. Europe must take action immediately…. “It’s not one individual bank, the whole sector is under pressure. Across Europe, bank shares are down about 50% since the start of the year. That has enormous impacts, because the financial sector is quite different from the cement industry: When one player falls, that is not an advantage for the others, rather it puts the whole system under stress.”

Folkerts-Landau engaged in some reality denial of his own, hoping that Deutsche Bank itself was well-capitalized. Its core capital is actually leveraged more than 30:1, and it is losing money, making that leverage ratio worse. It needs at least 10 billion euros in new capital, which is not offered by private investors. Instead, it has been trying to reduce its assets by more than 150 billion euros by selling off its commercial banking division (which includes the former Postbank), the recapitalization of which is crucial to Deutsche Bank’s reclaiming its role in the growth and productivity of the German economy. No German, but only Chinese lending institutions have made offers to invest in Postbank, and Deutsche Bank has not accepted them.