Dr. Germany Won’t Take Its Own Prescription

Europe’s new banking plan gets cool German response | Reuters.

Germany has been bullying its European allies to accept the loss of sovereignty in exchange for bailouts. This loss of sovereignty is supposedly for the good of the euro.

When Germany is asked to surrender some of its sovereignty for the good of the euro, it say, “Neine.” The article points out that a banking union will mean that Germany is on the hook for the deposits of the banking systems in failing countries. While this is true, it does not paint the whole picture.

Despite the Germans’ holier-than-thou attitude about their economic model, their banks are rife with the usual corruption and cronyism that occurs in all the Western democracies. Germany has a peculiar type of institution known as the landesbank. It is a like a savings and loan but is owned by the a German state.

Whenever you have a state-run enterprise, you have trouble. These landesbanks bought a great deal of American subprime mortgages and have made a lot of other dubious lending choices over the last few years. The last thing that Germany wants is opening these banks up to external scrutiny.

These landesbanks are woefully undercapitalized, and a real banking regulator would rate them according to international standards. This would lead to the German government being forced to bail them out with the cost likely being in the billions of euros.

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