The ECB ought to be satisfied: Since the first speculation about its QE programme, the euro has depreciated sharply, and the leading indicators point to an upturn in the economy. However, it will no doubt be quite some time before the bank is sufficiently reassured about the economic situation to start reversing its ultra-expansionary course. Like the Fed in recent years, the ECB will probably be guided not so much by growth rates as by the level of GDP and the unemployment rate.
And with core inflation well below 2% for a long time, the bank can be expected to leave its focus on stimulating the economy and to expand its QE programme rather than starting to scale it down at an early point or even to end it. The euro has lost more than 12% since last spring, and this plus lower oil prices – as the ECB had no doubt hoped – has given the economy a boost.
Fourth-quarter growth saw a slight improvement, and the rising leading indicators are grounds for hoping that this encouraging trend will continue. As a result, analysts have raised their growth forecasts quite generously. Under these circumstances, some are already betting that the ECB will start tapering prior to the original date of September 2016 or even end the QE programme altogether. Some ECB representatives have after all said that the euro has lost more ground than they envisaged, and the ECB has substantially raised its growth and inflation forecasts this month.
Strong recovery unlikely, … We have been expecting the economy to pick up again since last autumn – largely because the euro was weaker even then, and it was clear that oil prices were about to drop. We are sceptical, though, about the figure of almost 2% growth in the euro zone expected next year by the ECB, for two main reasons: • High private-sector debt levels: We have pointed out a number of times that high privatesector debt is an impediment to the euro zone economy at present (see chart 1). 1 It has risen sharply since the start of EMU, largely because monetary policy pursued has been too loose for most euro zone countries. The high debt level needs to be corrected, which is why an expansionary monetary policy is having far less impact. Italy and in particular the socalled core EMU countries such as France, Belgium and the Netherlands are affected here. • Only modest global economic growth: It is widely hoped that the weak euro will boost exports, and this will no doubt be the case. However, in many regions of the world the economy is no longer expanding as rapidly as in recent years. This year and next, the global economy excluding the euro zone is likely to expand by a little under 4%, making euro zone growth of almost 2% next year, as expected by the ECB, highly unlikely. In the past 15 years, growth rates of 2% or more have only been achieved in the euro zone when the global economy has expanded by 5% or more (see chart 2).
