January 26, 2015

European economies have structural problems

European banks own about 28% of the sovereign euro-zone bond market, and if they sell their bonds to the ECB (or national banks), they would be penalized 20 bps if they deposit the proceeds with the ECB. 

If the ECB buys bonds in a ratio similar to the ECB capital key, 18% would be from Germany, 14% from France, 12% from Italy and 9% from Spain. So, about 50% of all purchases would be in these four countries. 

Lastly, 80% of loans to European businesses flow from banks, not the capital markets. Banks have clearly shown an unwillingness to aggressively lend. At the same time, demand for bank loans has been very slow. Only a liberalization of labor laws, an easing of restrictive regulations and lower tax rates are answers to what ails the eurozone.

In other words, lowering the cost of money is not a solution to the Europe's economic stagnation.

The problems are structural.