Eurozone banks hoard €200-billion excess liquidity

Small and medium-sized companies account for almost three quarters of all jobs in the European Union, but authorities seem to deftly refuse any pushes for a definitive credit easing.

The admission by governor Mario Draghi himself that eurozone banks would still have over €200 billion of excess liquidity in deposits with the European Central Bank (ECB) has finally heated up the debate about using negative interest rates and punishing lazy financial entities: why should banks enjoy the comfort of placing money in the Frankfurt-based central bank for risk-free profit? They should instead letting it flow. After all, businesses are starved of cash to hire and invest.

The ECB monthly bulletin last week brought little news, indeed, although the scenario painted was perfectly reasonable amid the current circumstances: GDP forecasts for the common currency area show zero percent growth for this year, 0.3 percentage points below expectations. Inflation, meanwhile, will remain under 2 percent. Unemployment will continue at alarming levels.

It is true that the eurozone’s banks borrowed €489 billion at three years from the ECB, but the loans are being repaid–already €150 billion have been returned–without much trouble.

Some pro-monetary expansion analysts in Madrid, whose position echo along the Med Club coasts, welcomed the ECB vice-president Vitor Constancio saying aloud that the central bank could reverse the interest rates it gives on deposits. Then, banks would lose money if they tried to protect funds under the ECB roof and would feel impelled to lend. In 2010, the Bank of Sweden did just that, offering a -0.25 percent interest rate and forcing banks to take their liquidity out of the central bank, and move it.

Whenever extra liquidity is injected in an economic system and the monetary base increases, chances are that the currency exchange value falls. The vigour of the euro during the last months, appreciated against the US dollar and the sterling pound, has been translated by many market participants as proof of the European currency’s survival.

But would a moderated drop hurt anybody? On the contrary, economies with a newly found exports muscle like Spain’s and Italy’s could do with a weaker euro. It will hardly become the all-in-one solution, yet it’s worth reminding ourselves that Japan, the US and the UK have used monetary expansion measures, and have better figures to show than the eurozone.

For those who want the ECB tap open, though, there is more than just one lesson to learn from the way the US or the UK manage their economies. Transparency, effective reforms, more competition and less state intervention must be included in the package. And a real fiscal and banking integration will help, too.

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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