At the Delphi Economic Forum Jeroen Dijsselbloem, former president of Eurogroup, contributed his thoughts on the future of European banks, during a panel discussion organized by Economia Group. He insisted that Europe is over banked and therefore Banking Union and Capital Markets Union must be completed as soon as possible
Greek Business File April – May 2019
I want to talk about banks in Europe because when we talk about the European economy, Eurozone banks are still crucial. Unfortunately, in many countries banks are not positively promoting growth but rather are still holding us back. If we review the last couple of years, 2017 was a very good year for the Eurozone with very strong growth (more than what might have been expected). Nevertheless, investment activity was not strong enough and productivity was still very low when compared with the pre-crisis years. Banks in Europe, in general, are in much better shape. I think this is also true for the Greek banks but we are not there yet, more work needs to be done. A more wide-ranging structural issue in the banking sector in Europe is that we are simply over banked.
Too dependent on banks
And that is my key point today: over banking is hazardous in a couple of ways. First of all, in Europe we are still far too dependent on banks. Our economy across Eurozone is roughly 80% financed by banks mainly through bank loans and only 15-20% from capital markets. This is almost the reverse of the way the US economy is fi nanced and this is a real structural problem for our economy. I think in general terms it explains why our economy is less innovative, why we are still so slow to pick up growth, why it
took us so long to exit the crisis, why it is still so hard for innovative firms in Europe, young startups, tech fi rms that want to grow, to get financed. This is still a major issue throughout the Eurozone. We are too dependent on banks. We still have far too many banks, in my view, which is a cost effi ciency issue, and still too many banks that have not fully recovered and are restricting potential growth. Finally, I think a typical issue-certainly in many European countries- is that the link between banks, supervisors and politicians is much too close. This determines how we treat our banks and I think we should be more distant and a little tougher on the banks. In my opinion there is still too much protectionism.
More capital markets
What we need in Europe is less banking and more capital markets. This was the direction that the European Commission took with the Capital Markets Union project but it has lost its urgency. I think this is a huge mistake. We have gained real experience during the crisis. If there is a crisis in the real economy as it is now, 80% funded by the banks, it then targets the banks which are destabilised and which then have to be saved by politicians who then lose the elections. If there is a crisis in the financial sector it hits heavily the real economy, it derails the government finances and leads to austerity. We really need to cut that link. And the way to do it is to have well developed, well integrated European capital markets. So, the new European Commission has to reprioritise the project of Capital Market Union. In my mind, the urgency of that will increase due to Brexit. Final remarks. What this means for banks. You still need to get through the legacy issues. Further cost cutting is inevitable and more investment in technology will be needed for banks to get to that new future, that new position. Finally let us least quickly conclude the Banking Union. I am not only saying that to the Greek audience. I am also saying it when I go to Germany, to German audiences and in my country to the Dutch audience because the biggest hold up to completing the Banking Union and to establishing a well integrated Banking Union in Europe, the biggest problems at the moment are in the Netherlands and in Germany. So, trust me, I tell the audiences there the same thing: Let’s fi nish the Banking Union. The European Deposit Insurance Scheme (EDIS) is the fundamental element if we want liquidity to move around in conglomerate banks throughout Europe, we need EDIS to get rid of liquidity constrains. If we deal with these two things, re-prioritise the Capital Markets Union and finish the Banking Union there is more potential growth in all of our countries.