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Low interest rates will drive EU recovery

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The reasons for the ECB’s low long-term interest rate announcement last week, ways to boost lending to small firms and efforts to reduce the fragmentation of financial markets in the EU were among the issues debated with ECB President Mario Draghi by Economic and Monetary Affairs Committee MEPs on Monday.

Low interest rates

MEPs accepted Mr Draghi’s contention that low interest rates are the right response to weak economic activity and subdued lending dynamics. But even accepting that low rates will help drive recovery, they wanted to know why national and interbank rates remain much higher and how lending rate disparities among member states could be reduced.

Lending to SMEs

MEPs welcomed the desire to ease lending to small and medium-sized enterprises (SMEs) evident in last week’s low rate decisions. But they again argued that banks do not lend to SMEs enough, despite getting cheap funding from the ECB. They suggested that risk ratings for SMEs should be changed, to enable them to get loans and play their role in the economy.

Reducing fragmentation

MEPs voiced concern about the fragmentation of the EU banking sector and wondered whether banking union could lead to even greater fragmentation between euro and non-euro countries. They welcomed the Council agreement on resolution procedures for troubled banks, but stressed the need for resolution guarantee schemes. With a view to the ECB becoming a single supervisory power, they again stressed that it must meet high standards of democratic accountability.

Risks to the economy

In an earlier debate with MEPs, Mr Draghi gave his assessment of the economic risk situation in the EU, in his capacity as Chair of the European Systemic Risk Board (ESRB). They asked him whether fiscal consolidation efforts themselves posed a risk to the economy and anti-recession tools such as the ECB’s low long-term interest rates, could affect the build-up of risk. Others asked how successful the ESRB had been in inducing legislators to act on its recommendations to address risky practices or worrying economic trends.

Source: EP

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