Financial markets in Europe have stabilised since the crisis but credit demand and supply remain weak. Research shows that creditless recoveries, which are driven more by consumption than investment, tend to be relatively weak.
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.