In addition to the rising cost of bank loans, credit standards for approving loans to households and firms tightened across the board in 2022 Q2, according to the latest edition of the Bank Lending Survey. Looking ahead to Q3, in June banks expected a further contraction in the supply of credit, especially in the case of financing to SMEs. The tightening of financial conditions could increase the financial pressure borne by some firms. Short-term and floating-rate loans make up an important part of corporate bank financing, and the increase in market interest rates therefore passes through relatively swiftly to the average cost of debt. For Spain, it is estimated that, given the increase in market rates, the median indebted firm’s ratio of financial costs to profits before interest will rise by between 2.5 pp and 5.6 pp in the short term, depending on the percentage of debt and loans that are refinanced in the short term. In the case of households, it is estimated that the proportion that have a high net interest burden will rise by nearly 4 pp in Spain. This effect would be more pronounced among indebted households between the 20th and 40th percentiles of the income distribution. Meanwhile, the steep rise in the public debt-to-GDP ratio seen since 2007 also means that public finances are more sensitive to interest rate movements.
Thus, this episode has shown that structural policies that foster the integration and interconnection of European markets – in particular energy markets – and strengthen the 12  single market will not only generate greater resilience to shocks, but also drive competitiveness. Joint funding arrangements should be established to safeguard this common effort and avoid any excessive or highly unequal impact on national public finances. Common funding arrangements would enable financing for large-scale programmes based on shared quality standards and provide for a uniform approach for assessing programme execution. Headway must also be made in the expansion of the public and private risk-sharing arrangements in the EU. The euro area needs a permanent macroeconomic stabilisation mechanism – with revenue-raising and borrowing capacity – to complement the single monetary policy. It is also imperative that the banking union be completed with the establishment of a European deposit guarantee scheme. Lastly, we must press forward with constructing a capital markets union. 4. Concluding remarks In short, with war on European soil and a sharp rise in geopolitical tensions, the challenges we face are very complex. These developments, together with the additional series of shocks on an unprecedented scale from the pandemic, have pushed inflation to persistently very high levels both in Spain and in the euro area as a whole. Given this situation, monetary policy needs to be steered to ensuring that the direct effects of these shocks are not included in the formation processes for other prices and wages.