mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Bank Runs Speed Up European Decision Making

Together with the election of François Hollande in France, a European bank walk (more and more depositors moving money out of the banking systems of countries they think might be at risk of leaving the euro) is steering Europe toward a new set of policies. As the Financial Times details, Germany in particular is being forced to reconsider ideas they had previously declared non-starters:

The proposals, which could include empowering the eurozone’s €500bn rescue fund to directly recapitalise faltering European banks and commonly backed eurozone bonds, have been backed by some leaders in the past but forced off the agenda by the German chancellor’s objections.

Since the beginning of 2010, deposits in Greek banks have fallen by about a third, and the pace of withdrawal has accelerated sharply in recent days: on a single day last week Greek depositors withdrew €700 million. Meanwhile, deposits in Irish and Spanish banks have also been falling. In Spain, rumors of a bank run led to a fall of 30 percent in the value of Spanish bank shares. The banks recovered their value the next day, but the episode illustrated the alarming speed with which a modern bank panic can unfold.

That’s the thing about bank runs: They can go viral. The more you hear about other people taking their money out of the bank, the more you think you ought to do the same thing. When this snowballs, you have a true panic. It’s the kind of disaster that can wipe out big banks overnight, throw weak governments over the edge, and generally wreak havoc on the European and even world economy. No wonder European policymakers are scrambling for yet another set of contingency plans.

Features Icon
show comments
  • thibaud

    It’s obvious now, even to the Germans, that austerity is a disaster. A massive infusion of cash a la QE3 is the only way out.

  • Jim.

    So, any word on where they’re moving the money to?

    That would certainly affect what Germany will do here. If they’re moving the money from debtor banks to creditor banks, the creditor banks won’t collapse.

  • Andrew Allison

    I don’t see how you get from “. . . . but forced off the agenda by the German chancellor’s objections.” to reconsideration. In fact, the participants emphasized that the austerity agreements entered into must be honored. All the talk of a change in direction is Eurofudge. Merkel is prohibited by her constitution from changing course. It’s important to keep in mind that, at least for now, only Greece is actually insolvent.

  • Kenny

    The only contingency plan Europe has is INFLATION which is a hidden tax.

    They will start printing money and think they can control inflation to a ‘reasonable’ level.


    The whole place is going to burn. Watch and see.

    Anyone with any sense in the PIIG countries will have converted as much of the liquid portion of their wealth/savings into gold and/or silver.

    To trust in paper is to trust the word of the politicians and worse … the elite.

  • Kris

    I’d wager a large number of Germans are wondering why they should send money to Greece when even Greeks won’t keep their money there.

    Sure, that just shows how unsophisticated their thinking is [See how I covered myself?], but public opinion counts.

  • Brendan Doran

    What austerity are you talking about? I see only Ireland and Iceland imposing austerity.

    Unless by austerity you mean increasing spending at a lesser pace than Kamakaze Krugman recommends.

  • Tom Richards

    Thibaud, a massive infusion of cash via QE or some similar mechanism will be ineffectual absent crystalization of bank losses, probably involving shareholder wipeout, massive bondholder haircuts, forced debt-equity conversion and where necessary temporary bank nationalization. Loose monetary policy can’t be genuinely effective while the transmission mechanism is broken.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service