Forgotten growth

The details of the conditions attached to the Cyprus bailout and the extension of loans for Ireland and Portugal were at the top of the agenda of the Eurogroup meeting of finance ministers in Dublin last Friday. Another welcome issue on the table was the intention to curtail tax evasion in the European Union. As for the first item, it is worth pointing out that there has been general agreement with the decisions adopted so far by Cypriot authorities to restructure and recapitalize the banking system: the conditions have been met for the release of financial aid worth 10 billion euros.

As for Ireland and Portugal, and according to the Troika’s report, the dates for the repayment of loans will be extended to make it easier for both countries to access the financial markets and protect them from the evident risks of refinancing, especially for Portugal, whose difficulties are compounded following a recent ruling by the Constitutional Court, voiding budget cuts made by the government to satisfy Troika demands. Imposing additional adjustment measures in order to compensate for the cuts canceled by the judges will not pave the way for growth, debt reduction, or much less social stability.

Insisting on the application of tough fiscal adjustment measures in a setting of deep recession and high unemployment does not guarantee a return to normal financing conditions, neither in the above mentioned countries nor in others such as Italy or Spain, both of which continue to struggle with high financing costs. Improved conditions in recent months are a result of the announcement by the European Central Bank (ECB) last September that it will intervene in the bond market when governments request it, and more recently, a result of the liquidity injections by central banks in the US and Japan.

Financial suffocation

Although less explicit, one of the Eurogroup’s concerns is the very different ways of channeling credit within the monetary union. Small and medium businesses in Spain and Italy have to deal with greater restrictions to bank credit, and much higher costs, than those in central economies, even though their specific weight in their own countries’ economies is greater.

Although it has been slow to do so, the Spanish government is now demanding that the ECB take specific steps to neutralize this financial suffocation. But bank reticence will not be easily mitigated by the ECB, because this resistance to lend is based on the absence of growth and solvency. Without stimulus for demand, and without any expectations of job creation, any action to improve credit flow will be little more than a patch. Extending the deadlines for cleaning up their public finances and stimulating demand are basic conditions for economies such as Spain’s to require more European funds to continue shoring up banks. The Eurogroup needs to make the problem of recession a priority.