Deposit outflows from the banks of four countries in the eurozone are contributing to a failure of economic growth and undermining the joint currency itself. The deposit flight is also contributing to a two-tier system that is driving costs up in countries that must pay more to retain cash—and that in turn drives up other costs to consumers and companies alike.
Bloomberg reported Wednesday that, according to data it has gathered, a total of 326 billion euros ($425 billion) was pulled from banks in Greece, Ireland, Portugal and Spain over the 12-month period that ended July 31. That coincides with an inflow of approximately 300 billion euros to the banks of seven other core eurozone countries, including France and Germany.
As a result, credit is fragmenting throughout the region as costs increase for countries such as Greece to tempt depositors. That in turn drives up the cost of borrowing, as banks pass on those higher costs, and the end result is that growth in those countries is stymied and the European Central Bank’s (ECB) actions become less effective.
Deposits in Greece can pay as much as 5% more than in other eurozone countries. As a result, ECB data show that in Greece, the average rate during the month of July for new loans to nonfinancial corporations topped 7%; in Italy it was 6.2% and in Spain 6.5%. Such borrowing was far cheaper in France, Germany and the Netherlands, where the rate was only 4%.
“Capital flight is leading to the disintegration of the eurozone and divergence between the periphery and the core,” according to Alberto Gallo, the London-based head of European credit research at Royal Bank of Scotland Group. In the report, Gallo said, “Companies pay 1 to 2 percentage points more to borrow in the periphery. You can’t get growth to resume with such divergence.”
While some of the outflow is due to a reduction in exposure from banks considered core eurozone countries, such as Germany and France, the end result is the same—a group of countries with manageable expenses and another group paying considerably more for the same purposes.
In an April report, the International Monetary Fund (IMF) wrote in a report that such circumstances cap "the benefits from economic and financial integration” that are at the basis of the euro.
David Powell, a Bloomberg economist based in London, said in the report that such disintegration can result in a downward cycle as banks weaken, bound on one side by higher costs and on the other by caps on what they can charge, and economies in turn weaken as well.
Powell said in the report, “The financial divergence is a symptom of the underlying economic divergence, but they feed on each other, making it harder to break out of. Until companies and individuals are convinced that the euro will survive, they won’t invest in the periphery, and that will keep funds away.”