European Central Bank Vice President Vitor Constancio said the main reason lending is falling in the 18-nation euro area is economic weakness, something that an ECB review of bank assets won’t fix.
“If we try to disentangle what can explain this lack of credit, our conclusion is that predominantly it’s a lack of demand,” Constancio said at a conference in Brussels today. “Any remaining doubts about balance sheets will be totally clarified by our Comprehensive Assessment. This will not per se, alone, jumpstart the increase in credit and in growth.”
After 20 months of contracting credit to households in the euro area, policy makers have pointed to the ECB’s Comprehensive Assessment of the balance sheets of the banks it will begin to supervise in November as a boost to overall economic confidence. The euro-area recovery showed signs of cooling this month, as manufacturing and services activity turned out weaker than expected.
“For many other reasons, growth is indeed modest in Europe,” Constancio said. “The crisis itself, in particular with regard to investment, has affected the growth potential of Europe. That will take time to correct.”
Constancio said increasing output in the short term can’t be achieved by reshaping the financial sector alone, as there are other headwinds challenging the recovery.
“Exports will suffer no doubt by the deceleration in emerging countries, world trade will suffer,” he said. “There is also a debt overhang in Europe, it is not just the states it is also the households. The correction and repair of the balance sheets of economic agents in general has not yet been finalized, it’s still ongoing.”
ECB President Mario Draghi said this month the central bank may ease policy further in March if economic data do not improve. The ECB’s benchmark rate is at a record low of 0.25 percent.
“There’s a simplified narrative at the moment that growth in Europe is faltering right now, and in this narrative the main culprit is the behavior of credit and the behavior of banks,” Constancio said. “This story is too simple and not entirely true.”
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