Wall Street Journal: Will Banking Union finally deliver for the eurozone economy?

27 October 2014

For the moment, Banking Union looks like something that only exists on paper. Companies and households across the currency area are still very much judged by nationality rather than the content of their credit quality.

Small businesses – those most likely to seek a loan of less than €1 million –  in Spain and Italy still face much higher borrowing costs than their counterparts in Germany and the Netherlands. The divergence emerged most strongly as the eurozone was at risk of breaking apart during its debt crisis; it has only decreased slightly since, despite the large drop in borrowing costs enjoyed by the governments of southern Europe over the past two years.

These differences in interest rates lurk behind much of the slump in borrowing by the eurozone’s private sector.

There’s been much debate about whether weak credit growth in Europe is the result of weak demand for credit, weak banks that aren’t able to supply credit, or some combination of the two. Yet looking at the question this way obscures an important fact: demand for credit is weak at current market interest rates.

Credit demand would rise if the cost of credit – the real interest rate – would fall.

So will banks decide to expand their balance sheets now that most of them have been given a clean bill of health by the European Central Bank and the European Banking Authority? And will they be willing to charge lower interest rates? If so, the tests could bolster recovery, particularly in the eurozone periphery, where interest rates for private-sector borrowers still have plenty of room to fall.

Full article on Wall Street Journal


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