Slow lending pace doesn′t bode well for eurozone | Business| Economy and finance news from a German perspective | DW | 29.01.2016
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Slow lending pace doesn't bode well for eurozone

The European Central Bank's plan to reinvigorate the eurozone economy isn't having the desired effect, new data show. Pumping more than a trillion euros into the financial system has barely boosted banks' net lending.

How much banks loan to the private sector on a net basis is a key indicator of economic health. And in the eurozone at the moment, that health is questionable.

Data released by the European Central Bank on Friday showed that credit accorded to households and companies was up just 0.4 percent in December, compared with 0.9 percent in November.

The news is particularly discouraging for the ECB, which began a massive asset-swapping program in March 2015 designed to pump liquidity into the eurozone banking system.

Quantitative easing

That wall of money - some 60 billion euros ($65.5 billion) a month - was meant to drive interest rates and borrowing costs lower. The idea was that businesses and households would then be more willing to take on fresh debt.

But things haven't gone according to plan. Businesses outside of the financial sector and private households have been reluctant to get even deeper into debt.

In fact, total outstanding bank loans - and hence the overall money supply - have remained too weak to drive a recovery in the real economy.

Indeed, money supply growth slowed in December compared to a year ago, dropping to 4.7 percent from 5.0 percent in November. The ECB regards money supply as a barometer for future inflation.

Deflation fears

ECB chief Mario Draghi has been very worried about the eurozone's low inflation rate, which has hovered dangerously near zero for the past couple of years and even dipped briefly into negative territory a couple of times. If deflation takes hold, an economic slowdown can result.

Still, ECB hasn't got any other tool left in its toolbox, so it's considering doubling down on bond-buying. Draghi has not ruled out more stimulus measures if inflation in the common currency bloc doesn't pick up again soon.

cjc/nz (AFP, Reuters)

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