Throwing everything but the kitchen sink at deflation.
Photograph by Thomas Lohnes — Getty Images

New loans to businesses hit the highest level in over 3 years as the fear of the ECBs stress test faded.

By Geoffrey Smith
January 29, 2015

On the day that German inflation dropped below 0% for the first time since 2009, it would be going too far to say that the European Central Bank’s bond-buying splurge isn’t needed.

Still, figures out today from the ECB contain something that, if not a bombshell, is pretty important: lending to businesses rose by the most in over three years in December, the clearest indication yet that the region may be turning a corner thanks to the recovery of its banking system.

The figures confirm what the ECB had long suspected but was too embarrassed to spell out clearly: the central bank itself was responsible for much of last year’s credit crunch, by scaring the wits out of banks during a year-long “Comprehensive Assessment” of the 124 biggest institutions’ health prior to becoming their official supervisor.

As soon as that assessment and the accompanying stress test were out of the way at the end of November, banks felt they were able to lend again.

 

Tom Rogers, chief European economist with consultants E&Y in London, rightly points out that, before anyone gets too carried away, €10 billion of that was for loans under a year, “implying firms are still borrowing for working capital rather than for longer term investment.”

But the broader data from the ECB’s report also suggest that things have turned. Both broad and narrow measures of the money supply have turned up, and the ECB’s Bank Lending Survey released last week showed that not only are banks more willing to lend–businesses are starting to look a lot more willing to invest.

Finally, demand for credit is rising. Some of it is even for investment. Source: ECB Bank Lending Survey, 4Q 2014

 

For the moment, it’s more likely that “Eurozone Deflation” headlines are going to get the attention. Germany’s inflation rate fell to -0.3% in January, according to preliminary estimates out Thursday.

But the figures suggest that consumers aren’t as bothered as the headline writers. German consumer confidence hit a 13-year high in January (consistent with a 25-year low of 6.5% in the jobless rate).

One things seems sure: the chance of QE having a real impact is going to be much larger if banks are actually healthy enough to lend, and businesses have the confidence to borrow. With today’s data, at least half of that seems to be in place.

 
Watch more about the ECB from Fortune’s video team:

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