The main constraint on the resumption of growth is the failure to clean up the banking sector, observes Münchau in his FT column.
The growth rate of loans to the non-financial sector turned negative in 2009, showed some intermittent improvements, only to then deteriorate again last year. Things have not improved since: in August this year loans to the private sector were down 2 per cent over the past year. M3, a broad measure of money in circulation, grew by an annual rate of just 2.3 per cent in the June to August period.
The monetary and banking data are telling us that the economy will teeter on the brink of zero or low growth for the foreseeable future because the financial sector is not supplying the economy with sufficient funds to expand.
Banking Union could help, but only if it were to break the relationship between banks and sovereigns and clean up the balance sheets. Yet neither is going to happen. I believe Mario Draghi, president of the European Central Bank, is serious in his determination to produce a clean and honest asset quality review, which will start next month. He certainly does not want to repeat the mistakes of the European Banking Authority, which has lost its credibility with farcical stress tests.
But what can he do if governments fail to agree a fiscal backstop for this exercise? Would it not be irresponsible to admit that banks need several hundred billion euros in new capital when that money is simply not there? But without a clean-up of the banking sector, I see no trend change in the monetary and bank lending indicators – and this will postpone the recovery further.
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