If EU policymakers actually saw themselves as being responsible to the citizens of the EU, this is easy: require the banks to absorb upfront the losses on the excess public and private debt in the financial system.
This would immediately restore growth in the EU and set the stage for credit to flow again.
Three primary reasons:
- It ends the diversion of capital the real economy needs for growth, reinvestment and social programs from servicing the excess debt. With growth and reinvestment in the real economy resuming, demand for credit would naturally pick up.
- It ends the need for policies like zero interest rates, quantitative easing and austerity that create headwinds to economic growth. With economic growth, demand for credit naturally picks up.
- It ends pricing distortions caused by 'zombie' loans. One of the toxic side effects of the regulators engaging in forbearance and letting the banks use 'extend and pretend' to turn non-performing loans into 'zombie' loans is that it distorts the valuation of the collateral backing the 'zombie' loans. As secured lenders, this valuation distortion acts as a barrier to new loans as bankers have a hard time valuing new collateral knowing how much collateral is in the hands of 'zombie' borrowers. Eliminating the collateral valuation distortion eliminates a barrier to new lending.
If EU policymakers see themselves as being responsible only to bankers, 100% of the policies adopted since the beginning of the financial crisis support this notion, then getting credit flowing again in the EU is not only far more difficult, but virtually impossible.
Bankers will immediately realize that if the banks absorb the losses on the excess debt as they are designed to do this would be very bad for banker cash bonuses. As a result, they will try to block this solution.
Bankers will propose and support any alternative to the banks recognizing upfront the losses and their cash bonuses being reduced.
For example, bankers proposed and endorsed the notion that bank losses should be paid for by taxpayers by having the sovereigns recapitalize the banks. Never mind that this undermined the creditworthiness of the sovereigns and was completely unnecessary as banks are designed to operate with low or negative book capital levels.
For example, bankers endorsed the notion that bank losses should be paid for by savers. One way of getting the savers (actually all the taxpayers) to pay for the bank losses would be to tax their deposits at the banks.
Never mind that this tax violates the spirit of deposit insurance. Never mind that this tax reintroduces bank runs that deposit insurance ended by making depositors not responsible for the losses that the bankers run up.
So long as the EU policymakers see themselves as being responsible to the bankers and not the citizens of the EU, EU policymakers will adopt a series of policies that will not get credit flowing again.
However, should EU policymakers ever decide that they represent the citizens of the EU, then it will be easy for them to adopt the necessary policies to get credit flowing again (Iceland did this at the beginning of the financial crisis and it worked).