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거시경제 및 지정학

The Secret To Europe's Success

2019년11월8일 - 3 분 읽기

Bank integration will help the continent emerge from its doldrums.

Pop quiz! What was Europe's biggest news last week?

a. The launch of an election campaign that may (but may not) determine how Britain will leave the European Union.

b. Emotional celebrations marking the 30th anniversary of the fall of the Berlin Wall and the 125 people killed trying to jump it.

c. A fresh round of bond purchases by the European Central Bank that drove Greek government yields even further below U.S. Treasuries.

d. A technical proposal on bank deposit insurance from Germany’s finance minister.

If you answered d, then you understand that the key to Europe's future lies in its banks. The health and integration of these institutions will determine whether the continent can break from its doldrums of tepid economic performance.

BANK ASSETS AS A PROPORTION OF GDP

Source: Eurostat, ECB, FRB, BEA. As of June 30, 2019.

BANKING SYSTEM TIER 1 RATIO

Source: Bloomberg, ECB. As of June 30, 2019.

A decade ago, of course, banks nearly scuppered the whole European project, having been lured into a false sense of security as they poured money into Europe’s periphery on the premise that loans to Portugal and Ireland were no different from those in France and Germany.

The imminent collapse of the entire Greek banking system in 2015 forced the populist Syriza government to submit to the conditions of its bailout deal even though it had just won a popular referendum to tear it up.

In fact, the establishment the year before of a Single Supervisory Mechanism under the ECB ranks near the top of Europe's most significant historic achievements. It's not hyperbole to suggest that Europe’s future will be won or lost through its banks before any political backlash rips it apart.

Political theorists can write all they want about expanding democratic participation in European Union’s institutions, but recent nationalist tides have them on the defensive. Economists can argue, correctly, that the euro cannot survive without fiscal union, but that isn’t in the cards for this election cycle either.

BANK CREDIT AS A PROPORTION OF GDP AND NON-PERFORMING LOAN RATIO

Source: Eurostat, World Bank, ECB, FRB, BEA. As of June 30, 2019.

BANK INDUSTRY GROUP PROFITABILITY AND VALUATION

Source: Bloomberg. As of September 30, 2019.

But progress on securing and strengthening the banking system has advanced fitfully. Banks have always been more important to European growth in the absence of deep capital markets. Banks have also been at the heart of Europe’s lackluster growth when they have preferred to roll over troubled loans to powerful corporate clients rather than force change.

Banks’ willingness to load up on their home country’s bond issues have also left them vulnerable. Investors and depositors worry, for example, about Italian banks whose government bond holdings suffer during each budget stand-off with Brussels.

For today’s European banks, non-performing loans have become less of a problem than the ECB’s loose monetary policy and negative interest rates that make the traditional banking activity of maturity transformation especially challenging. Some fresh talk of fiscal spending may offer a glimmer of hope, but Europe needs to undertake a long list of structural reforms, too.

Thus, the importance of reinforcing confidence in banks. Beyond the single supervisor, European leaders committed to a bank resolution mechanism and deposit insurance that would backstop the resources of a struggling government.

Concerns about deposit insurance have also held back cross-border bank consolidation. Depositors’ trust ultimately depends on trust in national government to finance deposit insurance schemes, and among the lessons of the European financial crisis is that trust evaporates quickly.

“The health and integration of Europe’s banks will determine whether the continent can break from its doldrums of tepid economic performance.”

As the largest and richest European economy, Germany has always drawn hard lines around expectations that it would be on the hook for irresponsible neighboring governments and their bad banks. Its unyielding commitment to balanced budgets has further frustrated those same neighbors, who note that Germany benefits disproportionately from loose monetary policy and relative euro weakness while offering no fiscal support to regional recovery.

Finance Minister Olaf Scholz, who is angling for the leadership of his Social Democratic Party, set forth a technical plan last week timed nicely to draw fire from Christine Lagarde as she settles in as ECB president.

It also balances the important step forward to bolster confidence in banks with traditional German conditions. First, banks should acknowledge risk attached to their own country’s sovereign debt, which is currently counted as riskless. Second, there should be further progress on cleaning up bad debts. Third, governments must do more to align their rules on corporate taxation and bankruptcy.

The immediate reaction was expected. German conservatives bridled at the potential for new bailouts. Europeanists sighed at all the strings attached. Italy rejected the plan outright, given how much fresh capital its banks would need to raise.

But Europe has been built on complexity, argument and technical compromise, and this may just be the area where progress is possible. Amid the grand drama in London, the commemoration ceremonies in Berlin and the continued political sniping everywhere else, the prospects for Europe’s banks offer a far better measure for the continent’s prospects.

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