The stocks of European banks recover

Part of the reason for Europe's lost decade was the decline in European bank stocks

According to James Mackreides, it has now unmistakably turned the corner.

It's hard to recall a period when anyone was more optimistic about Europe than America, but prior to the global financial crisis, this was a common investment premise. The United States had a massive housing bubble, a huge trade deficit, and a steadily declining currency. According to the statistics at the time, consumers were largely reliant on spending their savings. However, as I mentioned last week, this data was later updated, and the eight quarters with a negative savings rate turned out to be an error. Europe appeared more stable and was ideally positioned to profit from the expansion of emerging markets, despite experiencing housing bubbles as well.

The results of this theory are well known. Since the crisis, Europe has lagged behind the US on almost every financial metric (though it is fair to say that Europe still provides a higher standard of living in many respects, but that is not what we are examining). There are a number of factors that work against Europe or in favor of the US, and the reasons for this go beyond the notion that America is just more inventive and dynamic.

There was far too much can-kicking and the eurozone debt crisis dragged on for too long. The US economy and trade balance benefited greatly from the shale revolution. Whatever one's opinions on Brexit per se, most would agree that the process was a tiresome and distracting upheaval for both the UK and the EU. The most recent example is Russia's invasion of Ukraine, which escalated uncertainty and fear, turned an energy disadvantage into a crisis, and unleashed a full-scale war on the borders of a continent that was completely unprepared and complacent. After all of this, perhaps we should be shocked that Europe hasn't fared any worse.

Even so, it didn't help that Europe focused far more on cleaning up its banks after the crisis than America did. US policymakers did not exactly get this right; interest rates were lowered too low and left there for too long, banks were given too much of a bailout, and those responsible for the crisis were not held accountable. Its bank stress tests, however, were successful because they produced well-defined plans for recapitalization, restored industry trust, and allowed banks to resume lending.

Bank stocks in Europe are rising.

Markets were aware that Europe's stress tests were a fudge. Banks did not quickly recapitalize; instead, they identified bad debts gradually as they refinanced. Extremely low interest rates slowed this process and hurt profitability. This implied that, even in the event of demand, they would not be able to lend. In the ensuing ten years, US bank shares thus greatly outpaced those of European banks.

However, European banks were finally doing better on the eve of the pandemic. Following their April 2020 bottom, shares started to rise. They have been surpassing US banks since 2023 and are getting faster. Values are increasing: two years ago, the Euro Stoxx Banks index was trading at 0.7, but now it is trading at 1.1. Although I dislike the banking industry and it is very cyclical, banks are essential to the economy. Europe should have more to run for in the long run if they want to catch up to the US this decade.

US and European bank ETFs.