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Can Europe’s Banks Save the EU?

NEW YORK – The multi-billion-dollar fine that the US government recently sought to impose on Germany’s Deutsche Bank for mis-selling mortgage securities in the United States has done little to improve confidence in the European Union, which remains plagued by slow economic growth, high unemployment, immigration challenges, and mounting uncertainty. What the Deutsche Bank scandal has done is shine a light on a last-resort option – a kind of “Hail Mary pass,” in American football terms – that could potentially save the European project.

Despite representing around 20% of world GDP, the eurozone does not have a top-ten bank or financial services institution in the FT 500 global ranking. The knock-on effects of such a fragmented and vulnerable banking system are apparent in Europe’s relatively poor showing in other sectors, such as technology and energy, that are vital for EU members’ economic future.

Europe has no shortage of banks: Germany has more than 1,500, and Italy has over 600. But many are “zombie banks,” with too many branches, too few deposits, and funding costs that far exceed those of their more successful peers.

In fact, according to the International Monetary Fund, some one-third of Europe’s banking sector, representing assets worth $8.5 trillion, remains weak and unable to generate sustainable profits. All of this creates significant downside risks for the EU economy and, ultimately, the entire European political experiment.