Analysis: Market crash exposes Europe’s divisions

  • Market rout highlights Europe’s Achilles heel
  • ECB tries to restore confidence dampened by soaring prices
  • Ministers are deadlocked over a decade-old plan to support banks

LONDON, June 16 (Reuters) – A market sell-off has revived memories of the eurozone debt crisis more than a decade ago, illuminating the divisions that have undermined the currency bloc’s efforts to forge a closer connection.

While the years since the debt crisis have seen the 19 European eurozone countries centralize and tighten banking controls, many planned economic reforms in Italy and elsewhere have been watered down as vast money printing has stimulated the economy.

Spurred on by fears that higher borrowing costs could stifle economic growth, the market rout exposed cracks in the uneasy alliance which, unlike the United States, is maintained largely by the central bank rather only by a government with the power to tax and spend.

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Two events this week reveal the fragility of the union: the ECB’s efforts to restore confidence in weaker states facing soaring borrowing costs at the end of its debt-buying program, and the failure of ministers for a decade to put savers in the bloc on a solid footing.

After a rare emergency meeting on Wednesday, the ECB promised further steps to temper the market sell-off, but the lack of a concrete plan to help indebted countries like Italy and Greece disappointed some. Read more

This was in stark contrast to 2012, when ECB President Mario Draghi tackled a crisis of confidence in the currency’s future by pledging to do “whatever it takes”, followed by an extensive money printing program.

Today, however, soaring prices, triggered by this money printing, as well as soaring energy costs following the Russian invasion of Ukraine and pandemic lockdowns in China, make this feat difficult. to repeat.

“It was easy to do the right thing when inflation was low,” said Guntram Wolff of the Bruegel think tank, adding that rising prices would cause the ECB to back down.

“The emergency meeting has created many expectations that the ECB will ultimately not be able to meet,” he said. “Only governments can address the real economic divergence and the incomplete configuration of the Eurozone.”

ECB interest rates and balance sheet

French Finance Minister Bruno Le Maire warned of a fragmentation of the bloc, the type of public warning once common but which has largely disappeared since vast money printing eased the debt crisis.

Speaking to students in London, Lagarde gave no further clues as to what ECB action might look like, speaking instead about climate change and the impact of war on global grain supplies .

“THROWBACK”

Divisions in the eurozone are likely to come to the fore when ministers meet later on Thursday to discuss a deadlocked plan to strengthen the bloc’s financial system.

A central pillar of financial crisis reform, the so-called banking union remains mired in debate, with the crucial issue of regional deposit protection still unresolved.

“We have gone backwards rather than forwards,” said Karel Lannoo of the Center for European Policy Studies.

“If there is a bank failure, it will be the same as in 2008,” he said, adding that individual states rather than the broader bloc would be left to shoulder the burden. “The Draghi period is over.”

Ministers are expected to further delay plans for a single safety net for bank deposits, long opposed by Germany which did not want to be responsible for problems elsewhere, extending the decade-long campaign to unify the sector to better withstand crises . Read more

Thomas Huertas, a former deputy chairman of the EU banking watchdog and now at the Leibniz Institute, said the lack of such a backstop put European banks at a disadvantage against their US rivals.

“It is one of those advantages that the person can see and recognize. It is an important element not only for finance, but I also think of the Union itself,” he added, commenting on the need for cross-border protection of savers.

This lack of progress with a banking union, in turn, has weighed on the stocks of European banks, which have lagged behind their American rivals for years.

Ministers’ debate comes amid Italy’s rising borrowing costs, exacerbated by ECB plans to raise interest rates and scale back its debt purchases to temper rising prices . Spanish, Portuguese and Greek bonds are under similar pressure.

Eurozone returns

Europe’s reaction is being watched closely by bankers and investors.

“A lot of what we do is a game of trust,” said Vis Raghavan, CEO of EMEA and co-head of Global Investment Banking at JPMorgan. “A lot of what we’re seeing is about confidence in politics and an orderly exit from stagflation.”

But with the ECB running out of ways to satisfy investors, the ball is back in the politicians’ court to act.

“While the ECB could satisfy the markets with a bazooka, it is becoming increasingly difficult to do so at a time when it has to fight inflation,” said Carsten Brzeski, an economist at Dutch bank ING.

“That leaves it up to governments to finally pull themselves together to find a real union.”

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Written by John O’Donnell; additional reporting from Leigh Thomas in Paris and Sinead Cruise in London; edited by Emelia Sithole-Matarise

Our standards: The Thomson Reuters Trust Principles.

Mary I. Bruner