Wells Fargo: Eurozone long run challenges remain

eurooppaEurozone continues to face some challenges that likely will restrain growth through next year and perhaps beyond, says Fells fargo on its report.

Restrictive fiscal policy should continue to exert headwinds on growth in 2014, says Fells Fargo.

“The decline in the aggregate euro area structural budget deficit from 1.0 percent of GDP in 2013 to 0.4 percent of GDP in 2014 that the OECD projects implies that there will be a negative fiscal impulse equivalent to 0.6 percent of GDP next year”.

Another problem is weak bank lending. According to Wells Fargo, total bank loans fell nearly 3 percent on a year-over- year basis in July (Figure 5), and bank lending to nonfinancial companies (NFCs) is especially weak.

This weakness in lending to NFCs is a major challenge facing the European Central Bank.

“But would banks really lend significantly more if the ECB cut its main policy rate, which is already at a record low of only 0.50 percent, if the ECB cut the rate by 25 bps or even by 50 bps?”, Wells Fargo asks.

According to Fells Fargo, weak banks may need more capital rather than lower interest rates in order to ramp up lending significantly, but capital injections are largely beyond the purview of the ECB.

Finally, the European sovereign debt crisis is not entirely solved either. Individual Eurozone countries do not have the ability to independently stimulate their economies if they are hit by an adverse asymmetric shock, Wells Fargo claims.