Friday, April 3, 2015

The ECB's Easing of Credit is effectively Subsidizing Bank Lending

Other factors are helping, too. The ECB’s easing of credit is effectively subsidizing bank lending. The fiscal drag from austerity will be smaller this year, as the European Commission becomes more lenient. And the start of a banking union also helps; following the latest stress tests and asset quality review, banks have greater liquidity and more capital to lend to the private sector.

As a result of these factors, eurozone growth has resumed, and eurozone equities have recently outperformed US equities. The weakening of the euro and the ECB’s aggressive measures may even stop the deflationary pressure later this year.

But a more robust and sustained recovery still faces many challenges. For starters, political risks could derail progress. Greece, one hopes, will remain in the eurozone. But the difficult negotiations between the Syriza-led government and the “troika” (the ECB, the European Commission, and the International Monetary Fund) could cause an unintended accident – call it a “Grexident” – if an agreement on funding the country is not reached in the next few weeks.

Moreover, Podemos, a leftist party in the Syriza mold, could come to power in Spain. Populist anti-euro parties of the right and the left are challenging Italian Prime Minister Matteo Renzi. And Marine Le Pen of the far-right National Front is polling well ahead of the 2017 French presidential election.


Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
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