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15th Apr 2024

EU state aid to banks is one third of GDP

  • Piggy-bank - one of the principles of the scheme was to keep public budgets in balance (Photo: the_amanda)

The EU's main regulator has approved state aid to banks worth almost a third of the 27-member bloc's GDP - twice as much as predicted earlier, with the highest rescue funds in Ireland and with none paid out in several states of central and eastern Europe.

According to a review published by the European Commission on Monday (10 August), between last October and mid-July 2009, the EU's executive approved guarantee measures designed to boost lenders' confidence worth €2.9 trillion and capital injections for struggling banks which amounted to €313 billion.

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The reaction, seen in Europe and beyond, came last autumn as the world got to grips with the worst financial and economic crisis since the 1930s.

According to the principles agreed by EU leaders, the state aid was to restore financial stability and resume credit flows in economy but without unbalancing state budgets or damaging the functioning of the bloc's internal market.

Based on these principles, Brussels filed a set of rules which the commission followed when approving national state aid schemes.

In its June report, Brussels predicted that public aid to the banking sector would cost Europe up to 16.5 percent of GDP while the current figures suggest that several member states might have undermined future public finances in their attempt to save the banks.

"This implies increasing explicit future public debt levels or implicit future debt levels. However, it is too early to judge whether thus far the response of governments to the crisis has been disproportionate," the study said.

For most banks in individual countries, a six month period, initially set as the duration of the aid schemes has ended and it is up to the commission to decide which schemes are eligible for extensions for "reasons of financial stability."

There are deep differences among the member states and the level of their state intervention.

Ireland, one of the EU countries most hit by the financial clampdown, received a green light from Brussels for aid representing 231.8 percent of its GDP and banks have taken up almost the whole package.

In contrast, nine states - Bulgaria, Cyprus, the Czech Republic, Estonia, Lithuania, Malta, Poland, Romania and Slovakia - have not applied for permission to use public funds for such purposes.

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