MONEY, John Stuart Mill said, is just a machine: a tool for doing things, like exchanging goods, that take longer without it. Milton Friedman upped the ante: “Because it is so pervasive, when it gets out of order, it throws a monkey wrench into the operation of all other machines.” In Europe things are even worse. The money machine is so badly out of order it may drive the economies of Italy and Spain into a depression.

To understand the scale of the problem, look first at the importance of small businesses in the euro area. Half of America’s jobs are in small and medium-sized firms (SMEs). In Europe such firms play a far bigger role. In France SMEs employ 60% of workers, in Spain the figure is 67%—and in Italy, 80%.

Because small firms do not issue bonds or sell equity in public markets, they rely on banks for borrowing. And since small firms are so vital, one of the measures of economic health in the euro area is how cleanly the interest rates set by the European Central Bank (ECB) feed through to the rates that firms pay. By that measure, the first eight years of the single currency were pleasant. If the ECB rate was 2%, firms would pay 4%. The difference between the two was small and it was stable. It made policy decisions easy: if the ECB thought the economy was overheating, it could raise its rates, confident that the rates firms would pay would rise by the same amount.

But that system has broken down (see Free exchange). The stable wedge between ECB rates and firms’ borrowing costs has been replaced by an unstable gap that varies by country. In Germany and France things are still close to how they were in the good years. The ECB rate has been 0.75%; firms have been paying around 3.5% to borrow. But in Italy and Spain the wedge has almost tripled in size, in part because banks there are paying more to borrow. When fears rise, most recently in response to the mess in Cyprus, funding costs to banks spike and are then passed on to firms. So SMEs in Spain and Italy must pay over 6% to borrow; money is tighter there than it was in 2005, even though the ECB’s rate is far lower.

For firms with new ideas, investment becomes more pricey. But even companies that plan to pay off existing debt are hit. In Italy borrowing by firms is around €855 billion ($1.3 trillion). A rate above 6% translates into interest payments of more than €50 billion a year. If Italian rates were the same as those in France, firms could refinance loans, and interest payments would fall by €22 billion. Lower borrowing costs would lift profits, which could be used to invest or pay staff more.

The Italian and Spanish economies are both in recession. With debt-ridden public sectors, fiscal policy is at best neutral; more probably, it will act as a drag on growth as governments seek to balance the books for years to come. In this situation economies need a big monetary boost. Instead, Italy and Spain are getting more drag. In the first months of 2013 credit supply tightened again. Facing higher interest rates, Italian firms paid back 10% of their loans in the past year. In Spain things are even worse: rates are higher still and total lending has dropped by 15%. These are the data of a depression, in economies large enough to plunge the whole euro zone into a much deeper crisis. Spain’s economy is almost twice the size of those of Greece, Ireland, Portugal and Cyprus put together. Italy’s is 65% bigger than Spain’s.

Whatever it takes

The ECB has already taken too long to act to ease small firms’ borrowing costs (it had another chance when it met on May 2nd, as The Economist went to press). Mario Draghi, its president, has said he will do “whatever it takes” to save the euro; what it takes now is fresh support for business lending. Any new programme must pass three tests. It must be targeted, aiming directly at the high and volatile funding costs that euro-area banks face. It should be conditional, tied to SME lending: Britain’s central bank, for example, now offers banks £10 ($16) of funding assistance for every £1 of new loans to SMEs. And it must be large—big enough to make the money machines in Italy and Spain work properly again.

One option is for the ECB to ease bank access to its existing low-rate funding window by accepting smaller SME loans as collateral. But that may not be enough. A bolder move would be to buy SME loans directly from both banks and non-bank lenders, focusing its purchases where credit supply looks tightest. The ECB is wary of policies that help one economy more than others. And buying or swapping assets in this way would mean taking on risk, creating an implicit transfer from all the taxpayers that prop it up, including German ones. These measures would also be tricky to unwind. But the alternative, an avoidable depression in Italy and Spain, is far worse.