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The European Central Bank’s plan to inject €1tn into the eurozone’s ailing economy may provide a welcome boost, but it will not fix the structural flaws in Europe’s financial system. The problem is an over-reliance on lending by banks, whose balance sheets remain four times the size of the currency zone’s gross domestic product – far larger than elsewhere in the west.
Jean-Claude Juncker, president-elect of the European Commission, has given full-blooded endorsement for the idea of creating a “capital markets union”. This slogan – shorthand for financing more of Europe’s economy using markets rather than banks – could become an important spur to growth.
Making this a reality will be one of the most important tasks facing Lord Hill should he be confirmed as the EU commissioner overseeing Europe’s financial sector.
We need to find new ways to channel non-bank finance to businesses and infrastructure projects which will require some significant changes to Europe’s market plumbing as well as the approach of policy makers to markets. Mid-sized companies need to be able to tap long-term savings via a new private placement market that gives them access to long-term cheap finance.