The Wall Street Journal Europes Banks Tighten Credit, Frustrate ECB
From an economic perspective, the major promulgator of the global financial crisis was the bursting of the United States Housing Bubble that primarily reached its full status during the period 2005-2006. In accordance with the growth in the prices of residential sectors within the United States as well as a considerably low interest rate, financial institutions initiated the practice of the provision of incentive based loans such as providing easy preliminary terms and conditions as well lower interest rates to entice households to purchase mortgages. However, once interest rates began to rise and housing prices dropped, refinancing of these particular loans became extremely difficult and consequently, during 2007 as defaults and foreclosure became common, major financial institutions and corporations as well as the average consumer who had invested billions of dollars in order to advocate the provision of these loans began to report major losses. From that point onwards, due to the inexplicable linkages of global financial corporations based within the United States in accordance with the large amount of foreign investment, the world entered into a recession of which the impacts are being witnessed even till today in the form of high unemployment, inflation and weakened financial systems across the globe.
The European Union, in accordance with its inherent link with the United States, also fell victim to the financial crisis and consequently had to take necessary steps in order to curb its most adverse impacts. Throughout 2009, the region has witnessed considerably slow recovery compared to other nations hence it is apparent why, even after the valiant rescue attempts of the ECB, major financial institutions and corporations within the European Union are extremely wary in terms of their credit policies. In essence, the article primarily discusses the fact that although the ECB has stressed upon financial institutions to relax their credit policies, private sector lending is still extremely low and this will eventually have extremely adverse impacts upon the economy in the sense that economic growth, specifically in regards to consumer demand and supply, will be lethargic.
The major crux of the ECBs policies, placed in simple explanatory terms, lies within the context of the principle that financial institutions, by relaxing credit policies and providing loans to the private sector, will eventually stimulate the economy in the sense that consumer spending will increase while simultaneously businesses will flourish by producing more goods and services. In this regard, German Chancellor Angela Merkel said The economy can only get going if credit supply is sufficient. (Blackstone and Koeppen) Stimulation of the economy is also extremely important in the sense that, as of December and mentioned specifically within the article, the European Unions unemployment rate reached an alarming 10 (Blackstone, and Koeppen). Considering this from a supply and demand perspective, it is apparent that if consumers will not have the ability to receive adequate financing, demand for goods and services will not flourish and eventually the economy will suffer as whole.
Economic reasoning behind the actions of the financial institutions within the European Union can be found when considering the fact that the recession had resulted in a major dip in global as well as domestic demand for goods and services. Hence, it would make sense for the banks not to provide loans in the face of low demand. However, in depth research of the economic outlook of the European Union as well as other regions of the world has shown that demand is starting to pick up as the recession is nearing an end. Also, in accordance with the information provided within the article, it has been stated that banks have tightened credit because of the new laws of the ECB regarding capital. However, it must be noted that the new laws were specifically designed to initiate a boost in capital reserves in order to stimulate the flow of credit, not to hamper it.
Inflation within the European Union has also been contained, well below target levels, which inherently has kept interest rates low as well. This primarily points towards the fact that the economy at this point in time requires an injection of capital, within the private sector, so that unemployment can be countered, household income can rise which in turn will entice people to spend on goods and services thereby stimulating domestic demand and eventually facilitating the flow of growth within the economy. The wariness of banks, in regards to loans, is understandable especially since global financial links in accordance with major investment in the United States Residential sector led to the recessionary period that impacted almost every nation within the globe. However, it must also be noted that the only way to stimulate the economy and to fund deficits appropriately, is for banks to inject credit thereby inducing the average consumer and private corporations to invest in government T-bills as well as domestic goods and services which will eventually lead to a higher GDP and a significant reduction in the unemployment rate of the European Union.
From the above discussion so far, we can conclude specifically that although the European Union is on its way to recovery, the foreseeable future looks extremely uncertain in the sense that the entire integration of the financial system of the various nations within the European Union will have to work with cohesion. Supportive fiscal and monetary policy will be required as well as the fact that global demand for imports has dramatically dropped and this will inherently impact upon the export sector of the European Union. However, rescue attempts by the government has primarily put a stop to the fall in private consumption, for which the banks have to play their part as mentioned in the context of the article under review. Consequently, though public spending has risen over the last 6 months, household consumption has primarily remained the same.
Unemployment, on the other hand, will remain high though several rescue attempts are being formulated such as private corporations following policies, in accordance with rising costs, of hoarding labor which primarily dictates firms to cut down on worker hours rather than the workforce. This policy, however, will enable firms to maintain the same amount of workforce even when economic growth picks up because they will primarily rely on meeting the possibility of rising demand by the amount of resources that they have already employed.
Consequently, in consideration of the all the factors that have been discussed in this report, we can conclude that lending within the private sector will remain low during 2010 because banks will primarily be recovering whereas unemployment and uncertain economic outlook will primarily weaken the demand and supply of loans. It must also be determined whether, as previously mentioned and supported by the article, financial institutions within the European Union have sufficient capital resources in order to counter default risk for the future. However, it is apparent that banks will need to relax their credit policies and inject money through the provision of loans to the private sector households and corporations in order to stimulate demand and supply of goods and services within the economy.