BRUSSELS (`) – European Union leaders met on Friday to assess the risk of a banking crisis emerging from the recent global financial turmoil that will hit the economy even harder than the energy crisis linked to Russia’s war in Ukraine .
EU leaders’ deliberations in Brussels follow the closure of two US banks, including Silicon Valley Bank, by US regulators and a Swiss-orchestrated takeover of troubled lender Credit Suisse by rival UBS.
The emergency measures on both sides of the Atlantic brought back memories of the 2008 global financial crisis and the ensuing EU sovereign debt crisis that nearly broke up the euro currency, now shared by 20 European countries.
“At the moment we don’t see any reason to worry,” Belgian Prime Minister Alexander De Croo told journalists on his way to the EU meeting. “But we’re watching it very closely, almost daily, because nobody knows what can happen.”
The European economy has been slowing rapidly since Russia invaded Ukraine exactly 13 months ago and the EU has been flirting with recession. The war has fueled inflation, prompting cuts in supplies of previously plentiful Russian oil, natural gas and coal, and hurting consumer and business confidence.
The European Commission, the executive arm of the EU, expects economic growth in the 27-nation bloc to slow to 0.8% this year, from 3.5% in 2022 and 5.4% in 2021. A projected recovery in growth to 1.6% next year depends on a sound banking sector able to lend to businesses and consumers and protect deposits.
The EU has tightened its regulation of financial institutions since the euro debt crisis, and so far there has been little sign of broader contagion in Europe from the dramatic rescue of Credit Suisse.
Yet financial supervision in Europe remains a patchwork of EU and national authorities pursuing common approaches rather than observing an actual single European rule book.
For example, the eurozone still lacks a common deposit guarantee scheme, which is widely seen as an important safeguard against future European banking crises. A standoff between national capitals on risk-sharing has left the bloc without this regulatory pillar.
On the market front, officials have said that European banks generally have adequate liquidity buffers – while calling for vigilance.
“I’m very encouraged by how much liquidity and resilience our banking system has built up,” said Paschal Donohoe, head of the eurozone finance chiefs group and Ireland’s public spending minister. “But we must never be satisfied.”
One reason for caution is that the European Central Bank has raised interest rates from record lows, straining lenders’ balance sheets and making it more expensive for consumers and businesses to obtain credit. The ECB is trying to bring stubbornly high inflation in the euro area, which stood at 8.5% in February, closer to a 2% target.
ECB President Christine Lagarde and Donohoe attend the EU summit to exchange views on the economy.
“I am very much looking forward to talks with the President of the European Central Bank to understand where we are going and what tools they want to use in the future – what is the outlook for our economy and inflation,” Estonian Prime Minister Kaja Kallas said.
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