March 26, 2012

Among the piles of papers on one European diplomat's desk in Brussels is a memo with the words "growth" and "jobs" scrawled in blue ink, followed by a large question mark.

"I think we're missing something," said the diplomat as he sucked his pen. "There's a lot of talk about growth strategies, but what about the banks? They are still not lending."

When EU finance ministers meet in Copenhagen on Friday, banks - and their reluctance to lend - will be high on the agenda as Europe looks to its economies at a time of austerity.

Blamed four years ago for triggering the global financial crunch and Europe's ensuing debt crisis, banks are now being criticised for being too cautious.

The European Central Bank points to a steady rise in the cost of borrowing and says access to finance has become one of the most pressing concerns of small business.

"Most small businesses feel almost hatred towards their banks," said Mark Fielding, head of the Irish Small and Medium Enterprises Association. "The level of loan approvals is somewhere in the region of 50 percent. The smaller the business, the less chance you have of getting money."

Europe's smaller firms are critical to the health of its economy, generating some 80 percent of all jobs in the 17-nation euro zone.

A record 17 million people are unemployed in the single currency area - more than one tenth of the workforce - and the bloc is sliding into its second recession in just three years, likely pushing the jobless rate yet higher.

EU leaders have repeatedly attempted to craft a formula for growth, most recently in a snowbound log cabin in the Arctic Circle at the weekend. Without higher bank lending, the effect of any strategy will be muted.

European companies tap banks for almost three-quarters of their financing, compared to about a third for businesses in the United States which rely more on capital markets.

European banks say they are willing to lend. But their resources have has been depleted through the financial crisis and they are under regulatory pressure to increase capital buffers, meaning they have to tread carefully when making loans.

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