Credit where it's due

Europe's lending boom shows power and limits of QE

The European Central Bank (ECB)'s bank survey shows how loose monetary policy is boosting demand for credit in Europe. That is helping growth. Yet the results are uneven and investment is scarce. The central bank's policies work, but governments need to do more.

The latest bank lending survey is a boon for the central bank, whose governing council is meeting this week. Asset purchases did create tensions within the ECB, and took yields on government bonds to freakishly-low levels. Now at least, there is some payoff.

The survey, based on responses from 142 banks across the monetary union, shows marked improvement in both the supply and demand for credit. The percentage of bank lending officers reporting a loosening in credit standards rose to -9 from -5 in January (a negative figure shows looser standards). Smaller companies, long neglected by banks and unable to issue bonds, benefitted equally. Better still, bankers expect demand for loans to accelerate over the next three months: the 39 net per cent of lenders that expect demand to increase is the highest since records began in 2003. It would imply gross domestic product growth of more than 2 per cent, according to Credit Agricole.

Collapsing oil prices help. Yet there's no doubt that the cocktail of negative rates and asset purchases, and the weaker euro, are boosting growth. As the ECB drives down yields on bonds and penalises cash with a negative rate, banks are more willing to lend. Since the start of last year, the cost of borrowing for non-financial companies has fallen by 75 basis points, according to Deutsche Bank.

Yet, QE can only go so far. There are still differences in the situation of member countries. And, it's not obvious that the increase in demand will necessarily translate into investment. In the first three months of the year, demand owed little to fixed investment, a factor which is usually correlated with capital spending and growth, UniCredit notes. In France, in particular, lacklustre investment was a negative factor driving loan demand.

The lending survey shows the limits of QE. The ECB can make it difficult for banks to sit on cash, and can entice companies to borrow. Yet, a sustainable recovery will need governments to reform, restructure excess debt and boost public investment. With the crisis a memory, they may well welch on their part of the bargain.