I attended a fascinating discussion on European banking organised by the Brevan Howard Centre
on Monday, including Ashoka Mody (Princeton, formerly IMF), Ignazio Angeloni (SSM) and Wolfgang Munchau. While set up as a discussion offering differing views on the state and future of European banking, after the different presentations I came away with a
rather grim assessment. First, weak banks continue to put a brake on the recovery (especially in Italy) rather than helping it. And as much as recent reforms, including the banking union and other regulatory reforms are going in the right direction, they might
simply come too late and much stronger policy action might be needed at this stage. Ashoka Mody pointed out that the sovereign-bank deadly embrace has turned into a debt-deflation cycle, with the delayed bank restructuring and recapitalization as contributing
factor. As much as the monetary tightening in the U.S, came too late in 2005 to help dampen the housing bubble, actions to address this debt-deflation cycle taken now in the Eurozone might be simply too late, especially if limited to monetary policy.
Much more dramatic debt reduction, including on sovereign debt across several periphery countries might be needed to get out of this vicious cycle, as also demanded by other economists (see for example Charles Wyplosz here).