2.1 The Issue
Since 2010, many European economies have struggled with high debt and low economic growth. The problem has been particularly acute in the eurozone, the group of nineteen European Union (EU) countries that use the euro as currency. (All eurozone countries are in the EU, but not all EU countries use the euro.) Many countries neighboring the eurozone have endured financial crises since 2010—most notably Greece, but also Cyprus, Ireland, Italy, Portugal, and Spain. Although the height of the eurozone crisis has passed, indebted governments, banks, and corporations continue to be a feature of many eurozone countries, a situation that could lead to more crises in the future.
One possible source of a reignited financial crisis in Europe is the banking sector. Banking crises can be particularly dangerous. Financial institutions and markets are built on confidence: if one bank fails, customers could panic and pull money out of other banks so that failure snowballs. Moreover, financial institutions and markets are global; a banking crisis in one country can quickly spread to others. The Great Recession began as a banking crisis when the U.S.-based investment firm Lehman Brothers went bankrupt in September 2008. Banking crises are also destructive because they can lead to a vicious cycle of economic problems, also known as a doom loop: when banks need governments to bail them out (i.e., provide money and resources to save them from failing), governments (sometimes already overindebted themselves) run into financial problems of their own, endangering confidence in the entire economy.
Eurozone banks have now recovered from the worst period of weakness (between 2010 and 2015). A return to steady economic growth in the eurozone in 2017 strengthened the banks, as did cheap credit from the European Central Bank (ECB) and injections of money and resources from governments. Even so, Europe’s banks are not out of danger. In an effort to increase confidence in financial institutions, organizations such as the ECB have begun work on protective measures to insure bank deposits—but these measures are incomplete. A banking crisis in a core country such as France, home to some of Europe’s largest banks, could have catastrophic effects on neighboring economies and even spread to the United States and beyond.