Avoid other crisis with a robust European mechanism
A scenario of a generalized rise in prices, a shortage of human resources, and a latent financial crisis could negatively affect the travel and tourism industry in the European Union. An inflation rate close to two digits squanders people’s purchasing power and forces the European Central Bank to raise interest rates to limit prices gallop.
As seen in the US, the strategy of some banks, which did not anticipate such an abrupt rise in the currency’s price, based on a scenario of low-interest rates, could lead to a loss of liquidity and a situation of default. The 2008 crisis taught us that no institution is too big to fail, so the fears of a new crisis are not unfounded.
After two years of the pandemic, the European economy is heavily leveraged in bank financing, in most cases with subsidized interest rates. Without other sources of finance, the EU industry is dependent on banks. For most reasons, the tourism industry, comprised of micro, small, and medium-sized companies, was forced to resort to bank loans to resist and face the constraints of the pandemic crisis. Responsible for around 10% of the EU’s GDP, Tourism continues to be the engine of the European economy and the one that can best respond to avoid an economic crisis.
Without emergency measures to maintain confidence in the banking system, I fear the EU will be plunged into a deep crisis. Despite showing a different robustness – for the better – than in 2008, the spillover effect exists and represents the greatest threat to the European economy.
The ECB is, therefore, in a difficult position: to fight inflation and, to that end, increase reference rates and, at the same time, ensure that the banking system remains available to support the European economy. Christine Lagarde has been firm in her decision to halt price rises. But will she have the same availability to act in the market to guarantee the deposits of all customers of troubled banks, similar to what it is North American counterpart did when the Silicon Valley Bank went bankrupt? Just this week, the ECB reinforced the liquidity of the banking market, stressing that it has the capacity for further reinforcements if necessary.
Although the solution to the Credit Suisse crisis may solve the problem for depositors, we know the bill will be heavy for bondholders, which could once again undermine investor confidence.
More than ever, coordination between the ECB and the Member States is crucial. On the one hand, the European banking system must continue its important role in financing the EU’s productive fabric. On the other hand, the fight against inflation is decisive in stopping the deterioration of the purchasing power of European citizens. Without this balance, the EU economy runs serious risks, especially the most vulnerable countries, such as Portugal, and sectors in need of financing and still in the recovery phase following an unprecedented crisis such as that inherent in the fight against the Covid-19 pandemic.
For a long time, the European Parliament has insisted with the European Commission and the European Council to create a direct funding line and a European observatory for the tourism ecosystem and less bureaucracy in accessing existing European funds. The complexity in preparing these same candidacies works as authentic barriers. This is the best way to strengthen the sector and make it even more resilient. This is the moment; let’s hope that a third crisis is unnecessary for us to act.