European Union: Weak Economies Remain Vulnerable to Banking Crises

Over the past two years, the European Union has created an environment in which member states facing economic problems can borrow at relatively low interest rates. Because of the European Central Bank's promise of intervention in debt markets, a sovereign debt crisis similar to what Greece experienced in 2010 seems unlikely. High unemployment and weak economic activity, however, continue to undermine the banking sectors of several EU countries, where a growing number of households and companies are struggling to pay back their bank loans.

While it is impossible to predict exactly when and where Europe's next banking crisis will take place, trouble is more likely in states such as Italy or Greece. Outside the eurozone, banks in Hungary, Romania and Bulgaria will also struggle to reduce their portfolio of nonperforming loans. Since a banking crisis is essentially a crisis of confidence, a relatively small event in a secondary country could trigger EU-wide fears of a generalized crisis.