Five years after the crisis – is Europe rescued? In the second part of this short analysis we are focussing on the banks and the urgent reforms we need to set up to create a stable banking system.
Many banks like Barclays or the Commerzbank are just running with public support. These banks are “too big to fail” and without the government support we would probably have an economic crash like we had in 1929. A prescription which could be written by the next members of the European Parliament to relieve and protect the banks would separate commercial banking and investment banking for customers. According to the campaign this separation would keep the commercial part of a bank safe for the daily business. Bubbles may be created but they would not affect the real economy.
Another idea to keep banks handy enough for a government to bail out an institution, without being in risk of insolence is to increase the amount of equity capital. This is a certain percentage of the banks capital which it is not permitted to lend; it has to stay in the institution to protect the bank in case of a bank run or a capital default of a few big debit costumers.
One reform which was planned after the downfall 2007 was to introduce a European supranational banking monitor system for all system relevant banks. This new planned authority needs a political frame, rights and the legitimization for checks and sanctions. However this field is profoundly complex – it is not highly likely to have a strict European regulation for banking and investing after the next five year term, even though it´s a political aim for the next term.
Additionally to the new regulations and monitoring, the new Parliament has to observe the work of the “European Stability Mechanism” (ESM) which is a new tool to protect us against the next clash.
Furthermore due to the crisis the people (and also companies and investment banks) are afraid to invest in Europe. The European Central Bank lends money to banks so that they can lend this money to customers to invest or to consume. According to the economic theory we create inflation if money is too cheap. Currently the ECB offers plenty of fluidity but certainly there are no indications of an inflation. Completely the opposite seems to be true: Due to the high risk to invest in the Eurozone it might be possible to face a deflation soon.
A deflation means that prices going down, the people do not invest because of the expectation of sinking costs. This process can be endless because if all people expecting sinking costs no one wants to invest, so the demand rate is close to zero.
This short analysis clearly shows that Europe is not rescued. It is a priority for the new European Parliament to continue a way of stabilization, protection and prevention against a new clash of our financial system. For us, the next generation which has to take responsibility for the debits of our parents and grandparents, this election is important to point out the differences in the symptoms and causes of the current crisis. Deflation and youth unemployment are dangerous and the new European Parliament has to find out a way of this situation. However urgent we do still need sufficient reforms of the banking sector.