On July 31, Deutsche Bank announced that it would cut 1,500 jobs from its investment banking branch. In the weeks leading up to the announcement, the bank found itself confronting a series of hurdles just as the company’s co-chairs settled in. Some of its problems, such as its involvement in the LIBOR scandal, are self-made. Others, notably its over-investment in investment banking, are products of the continued economic malaise inflicting the European continent. Crucially, the majority of the bank’s cuts are expected to strike not at its Frankfurt headquarters, but in New York and London, the capitals of Deutsche Bank’s investment arm. On a very real level, the German bank’s layoffs reveal the global stakes of continued economic uncertainty; investors’ prolonged uneasiness and European governments’ shaky responses to crisis instigate not only strikes in Athens, but also layoffs in New York. Particularly in the financial sector, the effects of uncertainty stretch well beyond their starting points to reach across the globe.
Pressure on investment banks has mounted since the beginning of the economic downturn in 2007, which began with a series of bank crashes that placed the entire global financial system in doubt. Deutsche Bank, though not unharmed by the crisis, emerged stronger than some of its rivals and continued to grow its investment banking services. Due to its worldwide diversification, Deutsche Bank’s investment banking sector was able to weather both downturn and recovery to a strong market position. Unfortunately for the bank, the uncertainty plaguing financial markets did not end with the Great Recession. Tumultuous European markets perpetuated doubt and slowed investment, leaving the bank overly dependent on its investment arm to generate profits. In that light, its downsizing comes in response to shrunken demand for investment and will theoretically bring the bank’s investment arm back into step with current market conditions while reducing costs.
Although the downsizing makes sense for the bank, it highlights an interconnected financial system in which uncertainty in Europe leads to cuts in the United States. As a result of the crisis’ actual and potential impact, it is with intense frustration that American policymakers must hear, as they did at the Senate Subcommittee on European Affairs’ August 1 hearing on the euro zone, that there is nothing they can do to bring about a speedier resolution. Although the U.S. economy is irrevocably tied to the European market, as hinted at by the Deutsche Bank layoffs, American policymakers are powerless to directly implement any programs to meaningfully reassure investors of Europe’s financial stability. Instead, they can only prepare for further fallout in the United States. Further complicating matters, the European public’s growing distrust of investment banks, fueled by suspicions of foul play in the last financial crisis coupled with reports of interest rate manipulation, could pressure policymakers to create additional regulations on European banks. The potential of European regulations on financial institutions that do much of their business outside the continent, such as Deutsche Bank, creates additional uncertainty on a global level.
With its international effects, Deutsche Bank’s downsizing hints at the dangers of a broader collapse in the European financial sector. While uncertainty may damage investment prospects and transatlantic employment to a limited extent, a meltdown resulting from the collapse of an interconnected European banking system would have tremendous ramifications in the real economy of Europe and the United States. As Deutsche Bank sheds 1,500 investment jobs, American policymakers will be forced to keep in mind the dangers posed to them by the European crisis. Moreover, they will be forced to wait anxiously as their European counterparts slowly develop a politically palatable series of solutions. While a defense of investment banking may be unpopular, its struggles are also not cause for optimism. The experience of Deutsche Bank should remind policymakers of the global economic networks placed at risk by prolonged uncertainty.