Europe has a finance curse problem

A new report reveals the depth of Europe’s finance curse problem.

The Finance Curse concept is a pretty simple idea, which can be summarised with a fried egg, writes Nick Shaxson.

We all need a financial sector, to provide the useful services our economy needs. That’s the yolk of the egg. But there are large parts of the financial sector — the white — that are not only ‘socially useless’, but which actively harm the countries that host them. (And of course the boundary between them is fuzzy and subject to debate.)

This is not remotely controversial. The obvious conclusion, subject to a couple of provisos, is that if countries shrink their financial centres in smart ways, they will be more prosperous. A landmark study from Sheffield University estimates that the total cost of lost growth potential for the UK caused by ‘too much finance’ from 1995 – 2015 is around £4,500 billion, worth roughly 2.5 years of GDP.

Now the German finance experts Finanzwende have produced a short, sharp report on this subject called “Shrink Finance for Prosperity” (German version is here.) Focused on European countries, it is full of information that fleshes out the finance curse thesis, and in new ways. For instance, here is a snapshot showing the dramatic growth of recorded financial assets in Europe since shortly before the global financial crisis, and the equally striking rise of shadow banking relative to other parts of finance.

And much more. One for the Finance Curse archives.