Europe’s leaders may have stopped the rot for now but the financial crisis is far from over and the region’s banks are still staring into a deep black hole.
They have been told to keep higher reserves of cash which means there will not be as much available to lend to businesses. The worry is that the bank recapitalisation plans risk a credit crunch.
Another problem for the region is that with flagging domestic demand for goods all countries in the bloc have been trying to boost their economies with export, but now orders are slipping.
A lot of the debt which sparked this crisis exists because peripheral euro zone economies are uncompetitive, both within the region and in comparison with emerging markets.
Consumer and corporate confidence is unlikely to be restored until there is a strategy for breaking the current vicious cycle of budget cuts, which are sapping economic growth and forcing ever deeper austerity.
To get more perspective on this euronews spoke to Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets in London.
Stefan Grobe, euronews: “Trevor, the summit was the 14th in the almost two years since Europe pledged solidarity with Greece. Does the result live up to markets’ expectations?”
“I think from the results you’re seeing in the initial markets reaction — with the equity markets up and the euro up — that one could easily argue that yes, given the expectations that there were, then the market reaction would suggest that they are happy with what they’ve heard so far.
“There’s a challenge — that challenge is whether or not those bits which have been left for November and December and later, live up to those expectations as well.”
euronews: “The banks were bullied into accepting 50 percent writedowns on Greek debt by the threat of a scenario of total insolvency of Greece. This is what is called “voluntary losses”. Banks are also being asked to shore up their capital and to build higher reserves. Is there any good news for the banks?”
“Well I think it is very difficult to find any, but if there was any, it was in a statement which accompanied the overall release which said something like that this was temporary, that the extra capital buffers required would be seen as exceptional and once the circumstances which led to those capital buffers being required were removed or lessened, then those capital buffers might be reduced, that was the implication of that statement.
“And to that extent there was something in there for the banks, but overall I think it is very difficult to find anything which was positive news from a banking perspective in Europe as a whole.”
euronews: “Europe’s economic position can only recover and the sovereign debt crisis can eventually only be solved through economic growth. Did the European Union create the conditions for that, given the tough new restrictions on banks?”
“I think the short answer has got to be no, the issue that was dealt with by the EU leaders’ summit was around how to reduce the potential contagion from any Greek default and that this was aimed primarily at making sure that banks had enough capital available. It hasn’t changed the economic equation, it hasn’t addressed the more fundamental issues around competitiveness of the EU countries and it certainly hasn’t done anything about the current trends in European growth — which are towards some weakness in the back end of this year and possibly the first part of next year and I think a potential for a quarter of contraction.”
euronews: “The oil giant Shell announced that it is planning to curb its investments in the EU because of doubts about the region’s chances of recovery. Is that an isolated opinion or will it become common corporate policy?”
“I think that clearly some companies are looking more at the European growth profile compared with that of other parts of the world, including the US and emerging markets, and further afield. On the surface I have to say there is a lot of pessimism about the competitiveness of Europe as a whole and whether or not the issues which keep growth weak have been really addressed. And those issues are pretty clear to everyone — it’s about regulation, it’s about the state of the banking sector, it’s about whether or not the EU is serious about reducing the tax burden on companies, and helping to encourage growth from those kinds of policies — and this communique clearly did nothing about that.”