EU leaders seek to dampen fears of a banking crisis and recession

European Central Bank (ECB) President Christine Lagarde, Latvian Prime Minister Krisjanis Karins and Eurogroup President Paschal Donohoe attend a European Union leaders' summit in Brussels, Belgium. Photo: REUTERS/Johanna Geron

EU leaders have played down the risk of a banking crisis developing from recent global financial turbulence in the USA and Switzerland.

At close of a two-day summit in Brussels, the EU leaders said European banks are generally sound and can weather a combination of rising interest rates and slowing economic growth.

Earlier Public Expenditure Minister, Paschal Donohoe, who attended the summit as president of the Eurogroup, warned that inflation is not declining in non-energy sectors of the economy and in some cases is increasing.

Mr Donohoe also said Ireland will have to move away from broad-based energy supports ahead of next winter. "We are seeing some signs at the moment that the composition of inflation is beginning to change. We're seeing some indications that the price of food, the price of services are also beginning to change," the Irish Minister said.

"Even though inflation is going down a bit, and it's mainly going down because the price of energy is showing signs of beginning to decrease, we're also saying [that] other goods that are part of how we measure inflation, are either not going down with the speed we would want or are beginning to show some signs of increasing," Mr Donohoe said.

Mr Donohoe said there is still scope for cost-of-living supports targeted at the poorest in the community. But he also hinted it would be unlikely that energy supports would continue into the winter.

"The exact scale of the supports as part of our budget next year and budgets to come will have to be defined when we get to the winter," he said.

After discussions about the Eurozone, German Chancellor, Olaf Scholf, told reporters that the banking system is stable. Dutch Prime Minister Mark Rutte took the same view. “Generally, I think we are in good shape,” Mr Rutte said.

In the past weeks US regulators have shutdown two American banks, and the Swiss authorities forced the takeover of troubled lender Credit Suisse by its rival UBS. These emergency actions revived bitter memories of the 2008 banking crash which hit Ireland particularly, costing Irish taxpayers some €45bn and trading in some EU market shares remained volatile yesterday.

Chancellor Scholz downplayed the idea of basic weaknesses at the German Deutsche Bank insisting it has become “very profitable” after modernising its business. “There is no reason to have any concerns,” he said.

The Russian invasion of Ukraine 13 months ago has slowed the European economy has been slowing and stoked fears of EU recession. The war has fuelled inflation through cuts in supplies of previously abundant Russian oil, natural gas and coal and this has further dented consumer and business confidence.

The policy-guiding European Commission predicts EU growth of 0.8pc in 2023 compared with growth of 3.5pc in the previous 12 months.