Conversation: Banks, Unemployment and Political Turmoil in Europe

Adriano Bosoni: I am Adriano Bosoni and I am a Europe analyst at Stratfor and I'm here today with Christoph Helbling who is also a Europe analyst at Stratfor to discuss the situation of banks in Europe, and its connection with unemployment and political events in the eurozone. 2014 is going to be a very important year for banks in Europe because the European Central Bank is going to perform a significant stress test for banks in the eurozone and that's going to be one of the key events in the eurozone year next year.

Christoph Helbling: Yes and I think before we talk about that stress test it's a good idea to talk about the importance of the banking sector in Europe compared to the importance of the banking sector in the United States. The banking sector in Europe is the main avenue for financing for the European economy — it is more important than in the United States. In Europe 75 percent of corporate financing comes from banks compared to 30 percent in the U.S. And because the European Union has a very heavy reliance on small and medium-sized enterprises (they are also important in the United States but even more so in the EU) because they make up two-thirds of the jobs provided in the private sector and about the same percentage of value added, compared to 50 percent for both of those indicators in the United States. It is very important to have a stable banking sector for the overall health of the European economy.

Adriano: And next year's banking stress test will [prove to be a] credibility dilemma for the European Central Bank because, on one hand, the European Central Bank is really interested in knowing what's going on in the eurozone's banking sector, but at the same time if the results prove to be too harsh there's a risk of an escalation of the crisis. And having the European Central Bank perform these stress tests is the first step before it can actually start working as a supervisor for the largest banks in the eurozone, and this is what is commonly known as the first step toward the creation of a banking union in the European Union. But there are further steps that are particularly controversial in Europe, right?

Christoph: Exactly and they are particularly controversial because they are tied to Europe's perennial dilemma of finding the balance between delegating power and maintaining sovereignty. So in this case, in the next steps, it's the question of who will decide when a bank is identified as being in trouble. Who will decide that it will have to be closed down? And what money (in case governments have to provide more aid), what and who should be providing that aid — should it come just from the governments or from cross border funds that are being put together? So that is a question that hasn't been answered yet but they will have to figure that out before the European Central Bank has completed the stress test and then says which banks are in trouble, because it's no use identifying the troubled banks but then not having a good mechanism in place to deal with those banks.

Adriano: And as you were saying before, all of these have direct implications on the ground in Europe, on the every day lives of most Europeans, because what we're seeing in Europe is a vicious circle, where governments are not spending because of the so-called austerity measures. And consumers are not consuming because people are facing higher taxes — people have lost their jobs or are afraid of losing their jobs so they are not consuming. And at the same time banks are not lending because in the context of rising unemployment people are more and more defaulting on their loans, so the banks are becoming increasingly afraid of lending money, and this is hurting the economic system in Europe.

Christoph: Yes, and it's a particularly troubling aspect for the European Central Bank which has proven to be a very potent authority during the crisis. The European Central Bank has played a vital role in ensuring that the financial aspect of the crisis is contained by buying government debt, by ensuring that there is enough liquidity in the financial markets to make sure that the banks don't just collapse as a whole. And the third point that it hasn't managed to solve yet is how do we make sure that the money that the Central Bank has provided reaches to consumers, reaches to small enterprises that are in need of cash, across a currency union that spans 17 countries. So the dilemma is that because there's a free movement of capital you have German consumers, German companies profiting from the very low interest rates that the European Central Bank is offering, while this is not benefiting Spanish or Portuguese or Greek companies because of the vicious circle that you just described before. How the European Central Bank overcomes this problem is one of the big questions that is still outstanding.

Adriano: And it's important to highlight that all of these are having concrete consequences because we are seeing, in Europe, that what was originally a purely financial crisis has now become an unemployment crisis because people are losing their jobs. And that, instead, at the same time, is having an impact on the political system because, as people lose their jobs, they also lose their support for the traditional elites who are perceived as the ones who put Europe in this current situation. And that's why we are seeing, across the Continent, increased support for nationalist parties who, on the one hand, criticize the political elite and criticize the establishment, but on the other, they also criticize the fundamentals of the European Union. These parties are saying, well, maybe it's not such a good idea to share a common currency. Maybe it's not such a good idea to allow the free movement of people across Europe because immigration is affecting the labor markets or maybe it's not such a good idea to have a free movement of the goods and services because that's hurting local industries. So we see how this financial crisis then turns into a banking crisis and now it's mostly a political crisis because unemployment is shaking the very foundations of the European Union.

Christoph: And because all these aspects come together is why we will be following the health of the European banking sector in 2014.

Adriano: Well, thank you very much Christoph. Thanks for joining us.