Eurozone banks are unable to support real economy’s dawning growth

Olli Rehn, Vice-President of the European Commission responsible for Finance and the euro, Jeroen Dijsselbloem, president of Eurogroup, Valdis Dombrovskis, Latvian Prime Minister, Andris Vilks, Latvian Minister for Finance, and Ilmārs Rimšēvičs, Governor of the Bank of Latvia, all holding giant false 1 Euro coins, in the festivities to celebrate the enlargement of the euro area to include Latvia (from left to right). (EC Audiovisual Services, 09/07/2013).

Industrial production in the European Union is definitively in a virtuous path as statistical data confirm business managers’ assessment, that their order books are as full as they have never been in the past. The same is true for industrial production. According to a press release published yesterday by Eurostat – the EU statistical service – “in June 2013 compared with May 2013, production of durable consumer goods grew by 4.9% in the euro area and by 4.2% in the EU27”. Also on monthly comparison base capital goods increased by 2.5% in both zones in June 2013, while during this same month compared with June 2012, capital goods grew by 3.3% in the euro area and by 3.2% in the EU27.

This is a statistically sound confirmation of an impressive betterment of economic sentiment in the euro area and the EU in general. Only some days ago the European Commission had issued a note saying, that in July the Economic Sentiment Indicator (ESI) increased by 1.2 points in the euro area (to 92.5) and by 2.4 points in the EU27 (to 95.0), continuing the upward trend observed since May. According to the same source the ESI’s increase was based on improved confidence among consumers and managers in industry, services and retail trade. The Commission confirmed that “Economic sentiment improved in four out of the five largest euro area economies, i.e. Italy (+2.9), Spain (+1.2), France (+1.2) and Germany (+0.7), while it deteriorated in the Netherlands (-2.0)”.

Industry grows

The managers of manufacturing firms, who participate in the European Commission’s business sentiment surveys, were also adamant about the betterment of economic climate in Eurozone and the EU’s as a whole. On that occasion the Commission’s statement for the month of July 2013 business sentiment. went like that, “In the euro area, managers’ assessment of developments in overall new orders improved markedly after last quarter’s deterioration. It is noteworthy that July’s reading of the number of months assured by orders on hand marked a new historic height in the EU…..The combination of positive developments in new orders, a rise in the number of months assured by orders on hand (in the EU even to historically high levels) and increasing capacity utilisation appears to point to a pending exit of the manufacturing sector from recession”.

In short there is no doubt that the European Union in general and Eurozone in particular are about to abandon their long-term recession. There is also good news even from the labour market. According to a recent Eurostat press release the EU27 unemployment rate was 10.9% in June, down from 11.0% in May. Unfortunately, on a yearly comparison base, unemployment was up in June.

This doesn’t change however the tangible betterment of economic climate In Europe during the past two or three months. In a fast changing world yearly comparisons may fail to describe short-term realities. Apparently this is the case with the European Union. Capital markets share this view. Over the past two weeks all major EU stock exchanges have recorded sizeable gains, despite the negative news about Eurozone banks.

The banks can’t

No to forget that EU banks have currently decided to continue reducing their size both in terms of assets as well as by cutting down the number of their branches. In this respect Eurozone banks are expected to reduce also their lending and borrowing. Given that EU’s real economy is thought to have entered into a growth period albeit slow, euro area’s banking sector remains its weak point.

Again the banks prove once more to be Eurozone’s dark spot, not being able to transmit to the real economy the abundant and almost zero cost liquidity offered to them by the European Central Bank. The excessive size of the lenders does not allow them to perform their duty towards the real economy, because they have overly exposed themselves to risky placements using borrowed money. Now that the real economy is about to expand and needs loans, the banks are unable to honour their basic mandate, being obliged to downsize in every respect. Lenders not only are unable to give out more loans but actually have to shrink quickly, selling assets (loans and placements) of around €3 trillion. Their size is currently three times larger than Eurozone’s GDP. In comparison the US banks are around 1.8 times the country’s GDP.

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