13 Mar 2015

Eurozone recovery is reversible, warns ECB

Filed under: Business News

European Central Bank executive board member Benoit Coeure cautioned that the region’s economic recovery is reversible and needs to be used as an opportunity by governments to boost growth potential.

“Be careful, the recovery is cyclical and led by low oil prices,” Mr Coeure said yesterday at a conference in Paris. Cheaper energy “may last for some time, but could also not last that long”, he said.

The remarks can be seen as a warning to governments that if they use ultra-low borrowing costs from the ECB’s bond-buying programme as an excuse to backslide on reforms, they’ll suffer. He was less bullish than ECB president Mario Draghi, who has said in the past week “our monetary-policy decisions have worked” and are “certainly” supporting the recovery.

Brent crude now trades at less than $60 a barrel in London, compared with more than $115 a barrel in June 2014. Yields on government bonds in the euro area fell to record lows yesterday, the fourth day of the ECB’s €1.1tn quantitative-easing programme.

National central banks purchased €9.8bn of debt in the first three days of QE, with an average maturity of nine years, Mr Coeure said. The programme, and its anticipation among investors, has helped to push bond yields on many securities below zero.

While it’s too early to judge the impact of QE on the real economy, a survey of purchasing managers by Markit Economics showed business activity in each of the region’s four largest economies expanded in February for the first time in almost a year. That signals the fragile recovery is slowly becoming more sustained.

ECB governing council member Jens Weidmann, who opposed QE, said at a separate event the outlook for the region’s economy was improving anyway and there was therefore no need for more stimulus.

“I remain unconvinced that the macroeconomic situation really warrants” QE, the Bundesbank president said in Frankfurt. “One especially problematic aspect is that the massive government-bond purchases will make the Eurosystem central banks the biggest creditors of the euro-area member countries. Fiscal policy and monetary policy will become even more closely entwined.”

On the assumption that QE will be fully implemented, the ECB raised its economic growth projections on March 5. It predicted that gross domestic product in the 19-nation bloc will expand 1.5% this year, 1.9% in 2016 and 2.1% in 2017. The economy hasn’t grown faster than 2% since 2007.

The forecasts showed consumer prices flat this year, largely as a consequence of the slump in oil prices. Inflation will average 1.5% next year and 1.8% in 2017. The ECB’s medium-term inflation goal is just under 2%. Markit’s surveys have shown growth strongest in countries that have pushed through reforms, such as Ireland, and weaker in nations that have acted more slowly, such as France. Mr Draghi said on Wednesday the ECB’s measures will work best if they “fall on fertile ground”.

Mr Coeure said looser monetary policy is having an impact on the economy and that will continue to be felt in the weeks ahead. “All the traditional transmission effects of QE are working,” he said. “We’re in a recovery phase and companies will start to re-invest.”

Article Source: http://tinyurl.com/kbwqb42

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