The ECB president is right to ease stimulus gently—the European economy still needs some helpby Vicky Pryce / October 31, 2017 / Leave a comment
The European economy is currently growing at a rate that hasn’t been seen for many years. Eurozone GDP grew by 0.6 per cent in the third quarter after a revised 0.7 per cent in Q2, and by 2.5 per cent over the last year. This is the fastest annual rate since 2011. Annual GDP growth in the European Union averaged 1.72 per cent from 1996 until 2017, so current figures look very positive indeed.
In recent months industrial production has been rising strongly. Consumer spending is picking up in many countries. Business confidence and the manufacturing Purchasing Managers’ Index point to that trend continuing. Forecasts are being revised upwards to suggest growth of around 2 per cent this year and next. Germany is likely to spend its projected budget surplus on infrastructure and other projects under pressure from the partners in the new coalition that Chancellor Angela Merkel is putting together.
What’s more French growth, now at an annual rate of 2.2 per cent, is picking up, allowing president Emmanuel Macron some room for manoeuvre as he pushes reforms through. Spain has been one of the best performing large European economies (though the Catalan crisis may knock it back). Even Italy is having a bit of a recovery despite the uncertainty created by forthcoming elections. And conditions in Greece are slowly improving—though there is still a long way to go.
The expectation therefore would have been that the European Central Bank (ECB) would be trying to “normalise” interest rates by now, moving from the low—in some cases negative—rates that it currently offers for certain types of deposits and lending. One might also have expected that it would have started to think about reversing Quantitative Easing, a process by which the ECB purchases assets with electronic money that did not exist before, and which has formed part of its “unconventional” monetary policy since mid 2015.
After all, the US Federal Reserve board recently announced that it will do this, and something may need to be done soon to deal with the ECB’s balance sheet, which has been swollen by the purchase of some €2 trillion of government bonds in the secondary market since the start of QE, in addition to other types of assets including corporate bonds.