Could Deutsche Bank crisis cause the EU to collapse?

The enormity of the crisis surrounding Deutsche Bank is another illustration that Brexit was the right decision. Indeed, if the crisis spirals any further there may not be much of a European Union left for Britain to leave

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Crisis what crisis?
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Jayne Adye
On 3 October 2016 13:45

The crisis currently engulfing Germany’s largest lender, Deutsche Bank, is one which has taken many people outside the financial community by surprise. We have long held the stereotypical image of German banks -- like the German economy -- as being rock solid.

It had been assumed the largest threat to Europe’s banking system would come from the Italian banks, with their £300 billion worth of bad debts. Yet it is the crash in value of the shares and bonds of Deutsche Bank, resulting in part from the $15 billion (£10.8 billion) fine proposed by the U.S. Department of Justice for the German bank’s mis-selling mortgage-backed securities in 2005-07, which now presents the biggest threat to the Euro and to the EU as a whole.

Deutsche Bank’s woes should not really come as a major surprise. The financial community has long viewed it as a bank with major problems. The International Monetary Fund (IMF) believes it to be the riskiest large bank in the world.

This is reflected in its shares which are down 53 percent this year, a clear sign of the market’s concern over its medium-long term profitability. Back in July the bank itself announced a slump in profits and revenues which were to be a taster of the problems to come.

All of this presents German Chancellor, Angela Merkel, with a serious dilemma: Does she step in to save the bank, in the event its woes continue, or does the German government leave it to its fate?

The options have serious political implications both within Germany, and Europe as a whole. The very idea of a government-led bailout is, due to a combination of historical and political reasons, an anathema to many German politicians. Memories still remain of the hyper-inflation which plagued the Weimar Republic and contributed to the rise of Hitler and the Nazi party.

Germany’s current government has fiercely fought against the European Central Bank’s attempts to write off debt and to bail out the banks of southern European nations, seeing itself as the guardian of financial responsibility within the Eurozone.

Banks in Cyprus were allowed to go to the wall when they were in trouble in 2012-13, with ordinary savers loosing around 10 percent of their savings to re-capitalise the bank.

Two years ago, Merkel stood by as the Greek banking system teetered on the brink of collapse, refusing to act until the rebellious Syriza government fell back into line. The Italian banking sector has been in crisis for several months, weighed down by a mountain of bad loans, yet the German Government has insisted Italy follows Eurozone rules, which dictate depositors have to shoulder some of a banks’ losses.

If Angela Merkel does bailout a struggling German bank -- and rumours suggest her government is willing to take a 20 percent stake in Deutsche Bank despite their public denials -- it would seem to the rest of Europe as a huge case of hypocrisy.

Southern European countries like Italy and Greece would rightly question why there is one rule for Germany and another for everyone else. It is not difficult to imagine the protests on the streets of Athens and Rome which would swiftly result. In fact, it would make life even more difficult for the Italian Prime Minister, Matteo Renzi, who is already facing an uphill battle to win a referendum on constitutional reform, which is seen as a vote of confidence in his leadership.

If Germany does bail out Deutsche Bank and continues to refuse a comprehensive rescue for the Italian banking system, it could create a tidal wave of anti-EU/German feeling within Italy, which would swiftly bring down Renzi’s government and bring the Eurosceptic Five Star Movement to power. Their major pledge to hold a referendum on Italy’s membership of the Eurozone would be but a formality, and the Eurozone would lose its third largest economy.

Agreeing to an Italian bailout is not seen as a much better option. There is significant fear within Brussels and Berlin that such a move would lead to a cascade of bailout requests, which could in turn bring down the Eurozone.

If the prospect of bailing out Deutsche Bank appears grim, then the prospects of its collapse are even worse. If Deutsche Bank collapses, which is entirely possible as the 2008 financial crisis demonstrated, it would almost certainly bring down the Italian banking system with it. A domino effect could easily see the French, Greek and Spanish banking systems follow them. Such a development would be a disaster for the Eurozone economy, which is in no position to withstand such a shock.

Angela Merkel is thus caught in an awful dilemma. Bailing out Deutsche Bank may save the Eurozone economy in the short term, but at huge political cost.

Allowing it to fail may be in line with German policy, but would almost certainly bring down the €uro and with it her government. The fact Europe has come to depend on the fate of one bank, reveals the huge folly of the €uro and the European Union which championed it.

All of this is but further evidence of why we must Get Britain Out of the collapsing EU.

Jayne Adye is the Director of cross-party, grassroots Eurosceptic group Get Britain Out

 

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