Graph of the week: Restoring credit is vital for the economy

Source: Financing the recovery: the state of Europe’s financial sector

The economy is growing, but credit is not

After suffering severe disruption during the banking and sovereign debt crisis, European financial markets have stabilised and started to function properly again over the last few years.

Although risk sentiment has broadly recovered and disparities in financing conditions across the euro area have diminished, credit to support economic growth is not being created.

The fact that banks still need to adjust their balance sheets continues to hamper their ability to lend. At the same time, demand for credit remains low because the economic outlook is still fragile and private debt levels are already high. The weaknesses in bank lending mean that more should be done to foster alternative sources of finance.

Financing the recovery: the state of Europe’s financial sector is a recent ECFIN economic brief that analyses the European financial sector’s ability to provide the credit needed to support economic growth and highlights policy considerations.