Sound bites: Eurozone bank lending still strangling recovery

Weak bank lending is still strangling the Eurozone economic recovery. The Eurozone banks have plentiful access to cheap money from the ECB, but they are not passing it through to consumers or businesses who really need it. Loans to the private sector continue to contract. Annual growth in loans to Eurozone households and companies is in negative territory to the tune of an underlying minus 3%. This is unsustainable in the long run. Without some quick intervention by the ECB, the Eurozone recovery will wither on the vine. What the Eurozone economy needs right now is much faster credit expansion, not credit contraction. The Eurozone banks need to be deterred from holding onto funds and encouraged to re-engage lending. The ECB can do this by cutting the official deposit rate, the interest rate for holding money with the ECB, and moving it into negative territory. This means banks will be charged for holding funds rather than releasing them go into the economy. Eurozone M3 money supply growth at 1.2% is well below the ECB’s 4.5% reference target rate. The ECB have their work cut out to get the economy moving into the fast lane of recovery again. Cutting Eurozone rates into negative territory, embarking into quantitative easing and weakening the euro would be the best policy avenues going forwards. Fortunately the latest whispers from the ECB and Bundesbank suggest that the policy die-hards are finally starting to wake up to.