Financial dependence and growth since the crisis

One of the fundamental roles of the financial sector is the efficient allocation of savings and investment through the relocation of external funds towards firms with investment opportunities, but with less available internal funding possibilities. This focus section examines whether the financial and sovereign crisis have had a deeper impact on growth in the euro area's industries that are more dependent on external finance and, thereby, on financial sector development and banks' credit supply. Regression results show that more developed financial markets have, to some extent, helped cushion the impact of the crisis on the industries that are more dependent on external funds in the euro area. The balance sheet structure of monetary financial institutions (MFIs) also seems to have played an important role. These effects have been differentiated across industries (tradable vs. non-tradable/services sectors) and asymmetric across countries (core vs. periphery euro area economies). Although manufacturing is generally less dependent on external funds than services, the crisis effects on growth stemming from the interactions between external financial dependence and financial sector development or MFI balance sheets are essentially present in the manufacturing sector. Market service industries attracted most of the surge in credit in the euro area economies during the boom years but the impact of financial development or MFI balance sheet structure on growth in these industries does not seem to have changed since the crisis. The persistence of some of the estimated effects over the 2010-11 period also suggests that the changes in the supply of finance brought by the crisis have a lasting nature. Firms' access to finance appears to have been durably altered by the crisis and not to have been just temporarily impaired during the sharp recession of 2008-09. In particular, there are some indications that manufacturing industries that have moved funding sources away from bank loans towards bonds and equities have benefited from faster growth in 2010-11, while the MFIs balance sheet structure and leverage seem to have continued to have a strong negative impact on industrial growth long after the 2008-09 recession, in particular in the core euro area economies.