Eurozone solves yesterday's problem

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Euro logo outside ECBImage source, Getty Images

The economic benefit for the eurozone of strengthening its remaining weak banks is likely to be muted, because its big flaws are elsewhere.

So what kind of economic impact will there be for the eurozone and European Union more generally, as and when 13 banks raise the 10bn euros or roughly £8bn they still need.

The bad news, in a eurozone apparently unable to break free from endemic stagnation and where its biggest economies - Germany, Italy and France - seem to be contracting, is probably not a great deal.

Or at least, not a great deal in a positive sense.

Even though over the last four years a big cause of Europe's economic woes has been a weakened banking sector, unable to create adequate credit, 10bn euros is a drop in the ocean of the EU's credit creation needs.

It represents less than 0.1% of the EU economy or output. And even if banks created new loans equivalent to 10 times that 10bn euros, as and when they have made those loans (and they may not for many months or even years), that new credit would represent less than 1% of the EU economy.

Which is trivial.

The best way of understanding why, in terms of a direct effect, this won't have much impact is to see that 10bn euros is a bit less than the capital available to Nationwide.

So if banks didn't raise it, that would be the equivalent of the Nationwide disappearing - which in the context of the giant EU as a whole, rather than just the UK, would not be desperately significant.

Or to put it another way, 10bn euros is a fraction of the capital available to Europe's biggest banks.

That is not the whole story of the asset quality review and stress tests led by the European Central Bank and European Banking Authority.

The knowledge that it was coming forced other banks to strengthen themselves by raising capital or shrinking their balance sheets.

And since a disproportionate number of the etiolated banks were in Italy, the flatlining Italian economy might receive a modest boost if its banks become more robust.

But there is no obvious reason why France or Germany will benefit, except from any knock-on benefit if confidence in the EU were to improve.

So will there be a boost to economic morale, as it were?

Well that depends in part on whether investors believe that this really was an eyes-wide-open assessment of the impaired assets owned by banks and the worst that could happen to them if the economy continues to deteriorate.

If that were the case, the share prices of banks would be underpinned, and that could make them more confident about financing growth - which in turn would generate that growth, to the benefit of banks and the wider economy.

Certainly this was a much more realistic evaluation than previous exercises.

But, again, that is not the whole story.

If this exercise to rehabilitate banks had been carried out two years ago, the impact on the recovery of the eurozone might well have been quite powerful.

But today the eurozone's weakness is as much about the demand for credit as the supply

It is all very well putting banks in a position to lend, but if households and businesses are reluctant to borrow, because their confidence in the future of the eurozone is shattered, then - like the proverbial gee-gee led to water - they won't drink (or borrow).

As the president of the European Central Bank, Mario Draghi, has been making clear for some time, the big priority right now is for the French and Italian economies to make themselves more competitive, for public spending reductions to be balanced by growth-stimulating tax cuts, and for there to be significant investment, especially in Germany and especially in infrastructure.

The eurozone's problem is no longer primarily a monetary problem, or a problem of a hobbled banking system unable to create credit.

The necessary repairs to the engine of eurozone growth are less to do with monetary lubrication and more to do with the structure of the engine itself - relating to whether the public sector is too big and spends money in the right way, and whether important elements of the private sector are too cosseted.

Fixing those flaws is very hard because they rub up against so many powerful vested interests - and they risk alienating millions of hard-pressed people, anxious about change, who often turn to anti-EU parties for succour.

But needs probably must, or the eurozone will never shed its impoverishing habit of fixing yesterday's problems today, and ignoring today's crisis till it has already wreaked its havoc.