Threats to Europe’s economy are mounting. Finance can help fortify it
an interview with us last week, President Emmanuel Macron offered his own diagnosis. There can be no great power without economic prosperity and technological sovereignty, but “Europe does not produce enough wealth per capita." It must become an attractive place to invest and innovate. This requires vast amounts of capital—and a well-oiled financial system that channels savings to promising investment opportunities across the continent.
The trouble is that European finance remains inefficient and bound by national borders. Pressing ahead with banking and capital-market reforms is thus more important than ever. A decade ago European banking was on its knees.
The sovereign-debt crisis in the south exposed an infernal doom loop. Because banks held a lot of sovereign debt and governments had to bail out banks in difficulty, trouble at one infected the other. Lenders were unprofitable, unloved by investors and saddled with non-performing loans.
Today those bad loans have been shed and profits have recovered. The share price of UniCredit, one of Italy’s largest lenders, has outperformed that of Meta this year. Big banks are now subject to European supervision and regulation, rather than a patchwork of national measures.
Yet banking on the continent remains cumbersome and parochial. Europe’s banking union, first proposed in 2012, remains incomplete, mainly because a common deposit-insurance scheme has yet to be set up. One result is that the doom loop retains its power.
Another is that too little cross-border activity and consolidation takes place. Regulators fear that if a bank collapses, they will be on the hook for loans made to dodgy borrowers beyond their borders. Without a common deposit-insurance scheme, governments
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