Another European Central Bank monthly meeting, another missed opportunity to make actual progress against the fragmentation of the credit markets that stifle Europe’s economy.
Governor Mario Draghi has indeed admitted in several occasions, and in his answers to the press, that there will be a return to healthy levels of economic activity only when banks in the countries worst affected by the current crisis–most of them on the Mediterranean coasts–lend again. But this is not happening.
The cause for the huge gap in credit access between Eurozone’s core country members and the periphery stems from the fact that wholesale capital markets show little interest in some southern European entities, which are perceived as high risk investments. If these banks cannot attract capital, they end up forced to stop their credit activities. The ultimate cause? The same distrust that fuelled the global credit crunch in the first place.
To tackle this situation, the authorities have carried out several stress tests over the banking sector: there is little doubt that investors and clients have today better information about European banks’ balance sheets. Yet, more transparency is still required. Although these exercises can backfire, somehow. In Spain, the stain of the once unlisted smaller savings banks has unfairly polluted the whole industry, and led to further information disclosure than in neighbouring countries.
Governments must participate, too, in the collective effort to unlock credit flows. Small and medium size companies, which are the main generators of jobs in Europe, need institutional support to access credit and more efficient programmes that the ones timidly and randomly implemented so far. Would we dare to say that public banking, when protected from corruption practices and party-politics manipulation, could fulfil this urgent mission?
But, among all the obstacles that the European economies find in their way to recovery there is one particularly intractable: the Eurozone’s central bank itself.
The ECB has proved to be too slow, and extremely fearful to display its powers. First, it should extend the types of collateral asset it accepts in exchange of providing capital. The latest move on asset-backed securities was incomplete and compensated by a reduction in fixed-income assets to be admitted, so there was no noticeable improvement for anyone. And secondly, banks in need of credit should have the recourse of new long-term refinancing operations or direct liquidity injections from the ECB.
Most market participants, from investors to traders to analysts, agree that these measures would definitely help Europe to successfully fix some of its most damaging problems. The consensus, nevertheless, is that nothing will be done until after the September German elections. We cannot wait.