This compares with significantly higher estimates for the US. As investors’ habits change in the euro area, the wealth effect should be expected to gain slowly in importance. The second channel – and probably the most important one for the euro – is the direct and indirect impact that fickle stock markets have on business financing costs.
Equity financing becomes more expensive, as investors are less eager to buy new shares and demand higher risk premia. Bank credit is harder to come by, as potential collateral shrinks in value. And, as investors become more riskaverse, rising spreads for corporate bonds may make capital market financing more expensive. Given surging capital costs, marginal investment projects become unprofitable.