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The banks, credit and the way out of the crisis


Nicola Melloni

Last Wednesday, faced with the threat of a recession that is already a reality in Italy and that, thanks to the fiscal pact demanded by Germany, risks bringing the whole of Europe down, the European Central Bank intervened with an injection of liquidity in the markets equal to Euros 500 billion. [ECB governor] Draghi’s aim was to stop the credit crunch, reactivate credit to companies and allow greater exposure of bonds in the market: immersed in liquidity banks could finally stimulate economic recovery and stabilize crisis-hit economies.

Unfortunately, these measures are insufficient and originate from a distorted view of the economic system. The path chosen for relaunching the economy appears contrived above all to favour the recovery of the financial sector by allowing it to access a vast quantity of resources at a derisory price. That is, banks can loan money at 1% interest rate and reinvest it in risk-free activities like German bunds, earning 3-4% without doing anything. But focusing on financial intermediation risks being counterproductive.

The ECB’s aim is that some of this Euros 500 billion is used to buy Government debt in order to slow the rise in spreads* without however any guarantee that the banks will buy the bonds of the countries in trouble, like Spain and Italy.

Above all, it is inexplicable why in order to support public debt you need to go through the private banking system when the ECB could intervene directly with the creation of Eurobonds. But this possibility has been ruled out with the same old excuse that states must demonstrate virtuous behaviour in order to source their financing from the markets.

Also, the institutional architecture of the EU is based on the independence of the ECB, an article of faith that is more important than the resolution of the crisis itself.

Take the reaction of the EU against Hungary that wanted to put its own central bank under the control of its government. The European criticisms were much more contained with respect to the racist and authoritarian measures taken by the government in Budapest, underlining the priorities of Bruxelles and Frankfurt.

In addition, despite recognising that the recession is linked to the crisis in industry, the EU bans direct aid to companies, and once again one has to rely on the financial sector to provide credit, without any guarantee of success.

The [real economy] market can’t be drugged by direct aid from the state. But the same rules don’t apply to banks that can take advantage of loans at discounted rates and are protected by public guarantees.

If direct aid to companies was provided they could have loans at 1% , the rate the ECB offers to banks. Instead the banks put their money bank into circulation at rates that are 4-5 times higher, profiting from their privileged position to fatten their coffers at the expense of industry.

More generally, the ECB continues to offer palliative care, even if necessary, without intervening on structural problems. An injection of liquidity can help overcome a temporary lack of confidence, but it can’t be a solution to the crisis that has been gripping us for almost four years.

As regards the banks, instead of flooding them with money and protection, it is necessary to change their institutional structure that at the moment forces us to continue financing them and saving them, at the cost of hurting industry and bankrupting governments.

On the economic front, supply side solutions continue to dominate – reactivating production with banking credit – while governments do everything to depress demand with taxes and cuts. The problem is that even with new opportunities to access credit companies won’t have any incentive to invest if at the same time demand does not increase.

It’s a classic Keynesian criticism of the incapacity of (neo-)liberalism to resolve to the crisis of over-production. If a part of the Euros 500 billion were used to create jobs, increase wages and boost private consumption, industry would be able to increase sales and profits, kicking start a virtuous cycle of growth. Unfortunately, logical and non-ideological solutions don’t seem to interest the European institutions.

23 12 2011


* gap in interest rate between debt issued by different governments – typically, expressed as the premium over safe, low interest German government debt

Revolting Europe translation

About revoltingeurope

Writer on Europe's Left, trade union and social movements @tomgilltweets or @revoltingeurope


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