Photographer: Jason Alden

ECB Stimulus Is Finally Reaching the Whole Euro Zone

Transmission of low interest rates to business loans in weaker economies had been virtually severed, but now it’s back
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Here’s a sign the euro-area economy is on stronger footing. According to economist Benn Steil, it’s the simple fact that monetary policy is actually working again.

Back in 2013, when the region was reeling from recent debt crises, the European Central Bank’s monetary policy wasn’t being reflected in lending rates in the region’s south. Greece and Portugal were both about to see serious bouts of deflation, but the transmission of ECB interest rates – at the lowest level in the institution’s history to that point – to business loans in those countries had been virtually severed.

That relationship has finally been restored, “perhaps the strongest sign” that the crisis has ended, according to Steil, who directs international economics at the Council of Foreign Relations in New York. In fact, the link between ECB rates and how much banks charge on new business loans is now, on average, “considerably stronger in the periphery than in the core,” he wrote in a blog post.

The turning point, Steil argues, was the summer of 2014, when the Frankfurt-based central bank didn’t just cut its deposit rate below zero for the first time, but also introduced cheap long-term loans to banks, known as targeted longer-term refinancing operations, or TLTROs.

The take-up of cheap cash among Italian, Spanish, French and Greek banks is estimated to have made up more than 80 percent of the overall amount, helping them to lower lending costs to businesses considerably more than banks in the core. Quantitative easing, which was agreed long after the first TLTRO, also disproportionately benefited the so-called periphery banks through capital gains on security holdings, Steil said. That program is expected to continue well into next year.

“The health of euro zone banks broadly remains poor,” according to Steil. But he’s optimistic that the fact that ECB policy is once again affecting lending rates “marks an essential step on the path to a sustained recovery.”

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