The diverging distribution of economic and financial conditions within the euro area has mainly been exacerbated by the ailing fiscal conditions at national level. In particular, banks’ funding costs have remained persistently high in some countries despite cuts in the ECB’s policy rate, in part reflecting fundamental- as well as non-fundamental risks associated with large sovereign debt.
In stressed countries, the limited and costly availability of credit has further hampered hiring and investment, while in the other countries, borrowing conditions have been favourable, making the fault line even deeper. Lenders in stressed countries as well as savers in all countries have suffered from the consequences of financial fragmentation.