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Heartbreaking Policy Choice
The pace of the economic recovery in the Eurozone should have been dictated by an active policy aimed at expanding the loans base to consumers. The expansion of loans to consumers would have been translated into more consumption, investment and, consequently, economic growth. This policy choice is an economic reality in the United States and the United Kingdom but not so in the Eurozone.
The increase in government expenditure, which was the other policy option available to reduce the size of the economic contraction, had been discarded a few years ago by the European Commission (EC), following pressure from the International Monetary Fund (IMF) and Germany. Conversely, austere fiscal policy adopted by the EC contracted the Gross Domestic Product of the region for six quarters. It also generated a loss of consumer and investor confidence that severely compromised the recovery.
Sadly, on top of the fiscal austerity imposed by the EC, the latest figures released by the European Banking Federation, show that the consumer loans base of the European Union ceased to expand at the required rate to drag the economy out of contraction.
Loans generated from the financial sector to governments and consumers have been following a declining trajectory by historical standards. Loans to governments contracted by 4.4% in 2011. This is in line with the contraction in public expenditure across the Eurozone. Additionally, loans to consumers, which should have been a key component to the recovery and have been closely monitored by the market, had increased only by 1.7% in 2011.
It is not alarming that private consumption contracted by 1.3% in 2011 and is estimated to contract again by 0.8% in 2012 but the lack of consumer credit from the financial sector has had a direct impact on consumption rates, which accounts for roughly 70% of the GDP in the area.
The obsession with austerity scores high on the agenda of the European Commission. The EC’s actions have only served magnify the economic downturn of the Eurozone over the last four years but as we know by now, EC policy choices are only indirectly designed to expand credit, which is the key ingredient to the recovery of the Eurozone.