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Crisis descended on an EU leaders’ summit in Brussels on Friday, as stockmarket jitters and banking sector turmoil undercut confident guarantees that all was well.
Bullish early-morning reassurances were overshadowed within hours by a financial sector turning bearish, with Deutsche Bank leading a European bank stock nose-dive.
The split-screen moment was eerily reminiscent of the eurozone crisis a decade ago, when EU summits were regularly hijacked by the travails of the sovereign debt crisis.
Though officials were keen to stress that the current situation was not comparable to the last crisis, which ultimately forced European countries to seek international bailouts, the financial picture was bleak on Friday — and one of the biggest signs yet that the U.S.-born banking failures were seeping into the EU.
Polish Prime Minister Mateusz Morawiecki, a former banker, told POLITICO in an interview that he was “concerned about some financial institutions in Europe,” pointing in particular at the role of investment funds in the banking sector.
Deutsche Bank’s stock dropped 14 percent at one point on Friday, a dip that came on the back of last week’s collapse of Credit Suisse and the engineered takeover of the bank by its rival UBS.
Today of all days
The timing could not have been worse for European Central Bank President Christine Lagarde and Eurogroup President Paschal Donohoe, who were meeting with EU leaders as part of a Euro Summit — a regular economic update sometimes tacked onto EU leaders’ meetings.
In a sign of how serious and sensitive the situation had grown, there was a limit on how many officials could be briefed on Friday’s discussions, according to two EU officials.
The EU’s top-two leaders — Ursula von der Leyen and Charles Michel — also ditched their traditional post-summit press conference, though two diplomats insisted the decision was made before the market started sliding.
Most leaders similarly left the meeting without speaking to the press. But for those who did, the message was clear: nothing to see here.
“We believe our banks are resilient, are strong, that the decisions that we have taken as regards the amount of liquidity, the amount of capital our banks hold will ensure that they will continue to be resilient in the time ahead,” Eurogroup chief Donohoe told reporters, seeking to calm the markets.
His language echoed that of Lagarde who — perhaps mindful that her every utterance can move markets — declined to make any public comments Friday. But privately, she reassured leaders that the European banking sector would weather the storm, thanks to strong capital and liquidity ratios, according to three people in the room.
Crucially, she also said the ECB was on hand to provide liquidity if needed.
“The ECB toolkit is fully equipped to provide liquidity to the euro area financial system,” she said, according to one person briefed on discussions, who, like the others, only spoke about the sensitive briefing on the condition of anonymity.
German Chancellor Olaf Scholz was similarly upbeat — particularly when it came to Deutsche Bank, the troubled German lender that led the banking sell-off Friday.
“There is no cause for concern,” he told reporters after the meeting. “Deutsche Bank has fundamentally modernized and reorganized its business model and is a very profitable bank.”
Italy’s Prime Minister Giorgia Meloni agreed, saying: “The fundamentals of the system are strong,”
Other leaders reiterated that things had moved on from the banking and sovereign debt crisis, pointing to the new systems for the eurozone, including a unified system to supervise banks and a board to oversee failing banks.
“Fortunately, Europe has learned the lessons from the financial crisis of the last decade,” Spanish Prime Minister Pedro Sánchez said after the meeting, noting that Friday’s market maneuvers had not changed the statement that ministers endorsed the meeting’s conclusion.
Public confidence, private anxiety
But behind the scripted public statements, a deep sense of unease permeated the mood in Brussels.
“We are confident about our measures and buffers, but of course this is a confidence issue, which always makes it difficult to predict how financial markets will react,” said one official in the room during the discussion with Lagarde. “So far, so good, but everyone is closely monitoring this and we remain vigilant.”
Others pointed out that the EU’s much-heralded banking union — an interlocking system of oversight and supervision that was set up in the wake of the financial crisis — remains incomplete.
The eurozone still lacks a common deposit insurance scheme to protect people’s banking accounts. Donohoe, who has been urging his fellow leaders to complete the banking union, said the latest news should reinvigorate the process.
“We should implement what we have agreed,” he said.
Countries like Germany have been reluctant to sign up to a common deposit insurance scheme, insisting that countries like Italy need to first reduce their economic risks. The dispute has stalled the negotiations.
But Scholz on Friday said there is now an incentive to move forward on both the banking union and the capital markets union — a years-old proposal to create a Europe-wide market to access capital.
“We will try to speed up the whole process,” Scholz said. “This is important for the future of our European Union. And the more we succeed in doing that, the more growth power will be fostered.”
Hans von der Burchard, Gregorio Sorgi, Jacopo Barigazzi and Lili Bayer contributed reporting.