Wednesday, April 29, 2009

Eurozone Confidence Up

Eurozone confidence is up (the EC's economic sentiment index rose from 64.7 to 67.2 this month). Yet European banks are not as far along in the process of cleaning up their balance sheets as Amerian ones. And according to the IMF, European banks are not, as many believe, in a better position than US banks to begin with:

Another statistic from the IMF report: to recapitalise the banking system to reach capital ratios that prevailed in the mid-1990s, capital injections of $275bn would be required for US banks, and a whopping $500bn for European banks.

You get the picture. All these data tell us that Europe has both the biggest problem and has made the least progress. And since recessions associated with financial crises last longer than ordinary recessions, as the economic literature on financial crises suggests, the eurozone has a big problem. The IMF says that even if the right policies are implemented at the right time the recovery will be slow and painful, because deleveraging takes its time. But if the right policies are not implemented, the recovery will take much longer.

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