Can Europe recover without credit?
Data from 135 countries covering five decades suggests that creditless recoveries, in which the stock of real credit does not return to the pre-crisis
• However, the implications of these historical episodes for the current European situation are limited, for two main reasons:
• First, creditless recoveries are much less common in high-income countries, than in low-income countries which are financially undeveloped. European economies heavily depend on bank loans and research suggests that loan supply played a major role in the recent weak credit performance of Europe. There are reasons to believe that, despite various efforts, normal lending has not yet been restored. Limited loan supply could be disruptive for the European economic recovery and there has been only a minor substitution of bank loans with debt securities.
• Second, creditless recoveries were associated with significant real exchange rate depreciation, which has hardly occurred so far in most of Europe. This stylised fact suggests that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return.
About the authors
Related content
What enlargement could imply for the European Union’s budget
The entry of nine new countries into the EU would impact the EU budget modestly while boosting national revenues for current members
Forecasting the daily exchange rate of the UK pound sterling against the US dollar
The new economic governance framework: implications for monetary policy
1982: the debt crisis that could have destroyed Western banking
What we can learn from four decades of financial turmoil and recovery