At the beginning of the euro crisis, many predicted Europe would be pushed into a closer union. Instead, the opposite seems to be happening: Europe is slowly fragmenting into a two-tiered structure with a safe, reliable core and a dangerous, floundering periphery. As depositors rush to withdraw their money from peripheral banks and put it into the safer banks at the core, companies in the periphery are finding it harder and harder to borrow money. Bloomberg tells the story of this accelerating bank run:
When financing by central banks isn’t counted, the data show that Greek deposits declined by 42 billion euros, or 19 percent, in the 12 months through July. Spanish savings dropped 224 billion euros, or 10 percent; Ireland’s 37 billion, or 9 percent; Portugal’s 22 billion, or 8 percent.
The decline of deposits in Southern European banks means higher borrowing costs for local companies and consumers. Unfortunately, this comes at precisely the time when the private sector needs a boost to offset the effects of austerity. The European Central Bank’s newly acquired unlimited bond-buying powers won’t be much help, as they are limited to government bonds and come with all kinds of strings attached. Private companies and consumers in Italy, Spain or Greece who are dependent on bank financing won’t get much relief from the new ECB powers.Even the ECB’s massive rescue plan won’t be enough to save the euro now. This crisis is far from over.