Graham Bishop's Blog: The euro crisis - The European Commission’s first attempt at counting of the cost
15 May 2014
The Commission has published an overall assessment of the impact of the massive change in financial markets since the euro crisis struck in 2007/8. But it is close to impossible to provide a definitive answer as many of the 40 regulatory changes have only just been enacted.
At long last… the Commission has published an overall assessment of the impact of the massive change in financial markets since the euro crisis struck in 2007/8. But it is close to impossible to provide a definitive answer as many of the 40 regulatory changes have only just been enacted and implementation remains quite some way off. Then comes the trade-off between the costs of higher bank capital versus credit supplies from the capital markets versus a less risky system. PHD students will spend the next decade (or two) arguing about the econometrics of this. But there is a stunning bottom line for society laid bare in the 345-page Staff Working Document – see extracts below.
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The financial and economic crisis caused large costs to the EU economy:
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Between 2008 and 2012, European governments provided state aid totalling EUR 1.5 trillion to prevent the collapse of the financial system (i.e. more than 12 % of 2012 EU GDP). In addition, central banks had to provide significant liquidity support - the ECB lent some EUR 1 trillion to euro area banks.
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Output declined sharply and the cumulative output losses, measured in present value terms, may amount to 50-100 % of annual pre-crisis EU GDP (about EUR 6-12.5 trillion, based on 2008 GDP).
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The crisis wiped out financial wealth, including wealth accumulated by households. The total net financial assets of households in the euro area declined by nearly 14 % between mid-2007 and mid-2009, but have since recovered.
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Households' trust in the financial sector has been considerably damaged. More than 60 % of EU citizens surveyed in 2013 stated that they had lost confidence in the financial sector (as well as in the relevant authorities) as a consequence of the crisis. Trust can be quickly lost but is slow and difficult to restore.
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The crisis was accompanied by significant job losses in the EU and increased poverty and inequality. The EU unemployment rate increased from a pre-crisis low of 7.2 % in 2007 to 10.8 % in 2013, with unemployment rising to more than 25 % in Greece and Spain. Compared with the end of 2007, an additional 9.3 million people are now unemployed in the EU. Between 2008 and 2012, the number of people at risk of poverty and exclusion in the EU has increased by 7.4 million.
With elections to the European Parliament just two weeks away, the understandable loss of trust in the EU’s political system could produce a citizen backlash that threatens the future of the EU itself. That would be the cruellest twist of the financiers’ knife if the economic gains of 60 years of integration were put at risk.
The numbers who would then be thrown out of work or impoverished would be a great deal more than the 16 million souls who have suffered that fate in the last five years. Financial market participants will count the readily-measurable costs of changing their accounting system and the like and then consider how much of such costs will come out of their bonuses. But they should pause to consider the broader consequences of their actions in recent years and perhaps be grateful that a safer system will still allow many opportunities to operate “a financial system that serves the economy and contributes to sustainable growth”: the overarching objective of the reform process.
Rolling blog
Graham Bishop - Consultant on EU Integration - Political, Financial, Economic, Budgetary
© Graham Bishop
