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08/12/2016

Europe’s markets still feeling effects of financial crisis

Euro & Finance

Europe’s markets still feeling effects of financial crisis

Vítor Constâncio. London, March 2013. [Chatham House/Flickr]

Europe’s financial markets are still feeling the effects of the crisis despite progress towards greater stability, according to two reports published Monday (28 April) by the European Central Bank and European Commission.

Vítor Constâncio, vice president of the ECB, said, “Given where we stood barely two years ago, on the edge of redenomination risks, such progress is encouraging. However, it does not mean we are entirely out of the danger zone.”

The reduced risk of a euro break-up, the move towards banking union and banks bolstering their balance sheets has improved the situation.  Developments in 2013 suggest that banks’ balance sheets have continued to improve, and that financial institutions have started to increase their exposure to cross-border sovereign debt instruments.

But financial fragmentation remains high. After the single currency was introduced in 2002, euro area banks began merging with each other. That trend continued until the crisis hit with such severity  it reversed this integration to pre-euro levels.

Financial fragmentation in the banking sector is blamed for variation in borrowing costs for small to medium sized enterprises, seen as drivers of economic growth,  across both the euro area and single market. It is still worse than before the crisis, and more integration is needed in the money, banking, bonds and equities markets, the reports said.

“A return to higher levels of financial integration cannot be taken for granted and requires sustained policy actions in the short term, especially the effective implementation of the banking union and, at the national level, carrying on with structural reforms,” said Constâncio.

The two annual publications, Financial Integration in Europe, and the European Financial Stability and Integration Report, were presented at a conference at the ECB headquarters in Frankfurt.

Internal Market and Services Commissioner Michel Barnier said, “Both reports underline the crucial importance of implementing the banking union to restore the financial sector’s capacity to support economic activity in the single market without creating excessive amounts of risk for society.

“The new legal framework will ensure that banks will face the same market discipline as any other business, rather than being bailed out by European taxpayers.”

Background

European policymakers agreed to complete a banking union on 20 March, creating an agency to shut failing eurozone banks.

Timeline

  • May 2014: European Council to vote on Single Resolution Mechanism and Bank Recovery and Resolution Directive.

Further Reading

European Commission