Meeting in an inclusive format in Brussels on Friday 24 March, euro area leaders sent a unanimous message on the strength of the European banking sector as Germany’s largest bank, Deutsche Bank, was badly hit on the financial markets, a new stage in the financial turmoil seen recently with the failures of US banks and Credit Suisse.
“Our banking sector is resilient, with strong capital and liquidity positions”, they said in their statement adopted at the end of the meeting attended by ECB President Christine Lagarde and Eurogroup President Paschal Donohoe.
Speaking after the discussions, Mr Donohoe echoed the “very clear” message from the heads of state and government. “The decisions that we've taken with regard to the amount of capital, liquidity that our banks hold will ensure that they will continue to be resilient in the times ahead”, he said. Of course we’re aware of markets developments that take place but it’s not appropriate to comment on them given how conditions can change, he said, reiterating the “confidence” of management in the banking industry.
For Dutch Prime Minister Mark Rutte, “it is normal that capital markets and stock markets are moving” in the current period of uncertainty.
According to a European source, Ms Lagarde spoke along the same lines to the EU27. “The euro area banking sector is strong because we have applied the regulatory reforms agreed internationally after the (2008) global financial crisis to all of them”, she reportedly stressed. For her, “the recent developments remind us how important it has been to continuously improve these regulatory standards”. She also reiterated that the monetary institute has the tools to provide sufficient liquidity to the financial system, “if necessary”.
Asked about the stock market collapse of Deutsche Bank, which lost nearly 15% of its value on Friday afternoon to finish at -8.5% at the close of the session, the German chancellor, Olaf Scholz, assured that the German bank had “modernised its business model since the financial crisis of 2008 and had become “profitable” again. “There is no reason to be concerned”, he insisted.
For French President Emmanuel Macron, the current context should encourage EU countries to “accelerate” the completion of the Banking Union in the euro area and the deepening of the capital markets union. This is what the declaration of the Euro Summit reiterates as the Commission is due to present a revision of the European banking crisis management framework in the coming weeks.
Completing the Banking Union in the long term requires the creation of a European deposit insurance scheme, after the establishment of the supervision and resolution components. In the short term, the reform of the European Stability Mechanism (ESM), the euro area’s permanent rescue fund, needs to be definitively ratified to allow the ESM to be linked to the Single Resolution Fund. Only Italy is still missing.
The President of the Italian Council, Giorgia Meloni, brushed aside the issue because of the hesitation of her government coalition. She just mentioned the importance of thinking about the issue in a comprehensive way and of developing the missing elements that are supposed to give the Banking Union its full strength.
Support for the reform of the European economic governance framework
Furthermore, according to Mr Macron, Member States must develop a fiscal strategy adapted to the macroeconomic context marked by excessive inflation and higher financing costs on the markets.
In this respect, Mr Donohoe recalled that the Eurogroup is asking the countries of the euro area to put their public finances back on a sustainable path in the medium term. This includes a review of the temporary emergency support for households and businesses most affected by soaring energy prices, with more targeted support and even withdrawal of support if necessary.
“It is understood that it is not possible to pursue a very generous fiscal policy at a time when interest rates are rising. But at the same time, we must also be able to make the investments that will allow us to reform our economies”, noted Finnish Prime Minister Sanna Marin.
Several leaders also discussed the reform of the European economic governance framework, which will be the subject of a legislative proposal by the European Commission in the second half of April on the basis of the Ecofin Council guidelines (see EUROPE 13141/22).
“It is essential that we move forward with the reform of Europe’s economic governance model”, said Portuguese Prime Minister António Costa. He welcomed the principle of differentiation, according to which national debt reduction trajectories will depend on the specific situations of Member States. He called for a “ permanent” budget stabilisation mechanism at EU level, along the lines of the ‘SURE’ initiative to support national short-time working schemes activated at the height of the Covid-19 pandemic.
Greek Prime Minister Kyriákos Mitsotákis rejected the possibility of a return to the previous fiscal rules, which will happen if the European legislator fails to adopt the reform of the Stability and Growth Pact by the end of 2023.
See the conclusions of the Euro Summit: https://aeur.eu/f/60r (Original version in French by Mathieu Bion)