That shows that the ECB's liquidity is connecting with the real economy, in spite of an apparently gun-shy banking system that is still channeling most of its lending to sovereign borrowers. Banks are rebuilding their capital base after long years of recessions and slow recovery. But once that process is finished, banks will return more vigorously to their core business of lending to firms and households.
Here is how that adjustment process is unfolding at the moment. Last April, the euro area's lending to the private sector was only 1.2 percent above its depressed year-earlier levels, but lending to governments was accelerating to an annual rate of 10.4 percent.
The fact that banks' return to a stronger funding of the private sector is so slow is sad testimony to the huge damage that major euro area governments – primarily France and Italy – did to their economies by allowing themselves to be maneuvered into German fiscal austerity nostrums.
It is pleasing to see that this disaster is being overcome, but it is clear that the weak bank lending to the private sector, and a price deflation of -0.2 percent in April, leave no alternative to the ECB's monetary expansion, despite relentless attacks and pending lawsuits from the bank's German constituency. [Germany's Constitutional Court, the highest court in the land, will rule on the latest German complaint against the ECB on June 21, 2016.]
Meanwhile, the ECB's supportive policies, and the prospect of stronger euro area growth, are positive signals for the area's stock market values in a grotesquely oversold environment.
Additional positives are that France, Italy and Spain – one-half of the euro area economy – are rejecting German efforts to re-impose fiscal austerity and socially unacceptable structural reforms via the Brussels EU Commission and the Eurogroup (a forum of euro area finance ministers).
Squeezed from left and right, the beleaguered French president (currently polling at about 16 percent) is turning a deaf ear to pressures from Brussels to cut public spending. And neither is he rushing to push through Brussels-mandated new labor laws (i.e., part of structural reforms) that have caused widespread protests ("Nuits Debout," massive nightly demonstrations on the Place de la République in Paris for more than two months now), paralyzing strikes in the country's transportation system and huge sanitation problems of uncollected garbage piling up on Parisian streets.