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A European Failure of Epic Proportions

Over Easter, Florence’s opulence was in great display, reminding visitors of the splendid times of the Renaissance period which followed the historic black hole left by the Middle Ages. The Renaissance was also the time of the expansion of the banking industry, and this was no coincidence. Letters of credit supported by a fast-growing banking network facilitated an acceleration of international trade starting in the 15th century. Banks were center stage, entrusted by the Pope to manage his finances whilst lending vast sums to monarchs to run their wars. The prohibition of charging interest rates (usury) by the Church was cleverly circumvented. Prosperous bankers such as the Medicis sponsored artists and scientists including Leonardo da Vinci, Michelangelo and Botticelli, partly motivated by a Christian desire to secure a visa to heaven.

The ‘Admiration of the Magi’ by Gentile da Fabriano epitomizes the Renaissance – when art and mercantile motives pursued by aristocratic financiers worked hand in hand under a religious cover. Commissioned at great expenses by Palla Strozzi, a wealthy banker and businessman, the gothic painting is phenomenally rich, almost brought to a third dimension by the extensive use of golden leaves. The biblical theme is that of humanity represented by the Three Kings offering welcome gifts to Jesus, the incarnation of God according to Christianity. It was not a totally innocent painting. The theme meant to mirror Strozzi’s own donation to God as the piece of art was to be hung in a local church. In addition, Palla Strozzi had his father and himself included in the picture which immortalized them. Finally, the use of beautiful clothes to dress the three ‘Wise Men’ was a not so subtle scheme to advertise the family’s merchandise.

Over the centuries, banks have continued to evolve. At a basic commercial level, they built sophisticated risk management capabilities to transform small short term deposits from one location and one currency into large long term loans available in a different currency and in a different location across a range of credit quality. As the financial markets gained scale, investment banking brought an additional matchmaking dimension: public investors with public investors, public investors with corporates in addition to corporates with corporates. Whilst financial innovations have had, like any innovation, some positive and negative impact on the world, banks, more unloved than admired, have played an essential role in the growth of economies since the Medicis.

Which is why what is happening in Europe is cause for great concern from a geopolitical equilibrium point of view. First, the City of London is at risk of losing its global prominence in the financial markets as a result of a Brexit-driven dismantling. Second, European commercial banks are finding it challenging to consolidate their fragmented industry due to the absence of a unified banking framework, which prevents them from achieving acceptable returns and thus from investing in new ‘fintech’ technologies. Third, European investment banks have been losing market share to their US counterparts who have been leveraging their presence in the large and profitable US market to subsidize their European operations. The combination of these trends may see non-European financial institutions dominate not only global finance but also European finance in the foreseeable future.

But can a global power prosper without a proprietary and sustainable model to fund itself? The European continent has always been ambivalent about capitalism and the financial markets. The last financial crisis decisively turned feelings against financial institutions. Yet by disallowing its domestic banks the possibility to achieve scale and profitability, Europe, already dependent upon NATO for its defense, is putting itself at a further significant competitive disadvantage versus other regions. One way or another, it must find a way to promote its own commercial and investment banks as a matter of industrial policy. Otherwise, instead of spurring a new Renaissance at a time of great digital opportunities, the Old Continent runs the risk of returning to an economic, technological and artistic black hole.

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