Tuesday

30th Aug 2016

Eurozone on way back to growth, Draghi says

  • Financial markets are having a better sentiment about the euro (Photo: guysie)

European Central Bank (ECB) chief Mario Draghi on Thursday (10 January) spoke of "positive contagion" in the eurozone economy, saying that the financial situation is improving and growth is set to return in the second half of the year.

In support of his sunny prognosis four years into the euro-crisis, he cited a set of indicators: cash flowing back to eurozone banks, Spanish bonds selling at low interest rates and reduced risks on the ECB's own balance sheet.

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The improved sentiment on financial markets is partly due to the announcement last year the ECB would buy unlimited amounts of government bonds if a country is under market pressure and requests help.

He also mentioned the "significant steps towards greater [EU] integration" made last year, such as plans to create a banking union, as a positive factor.

"Contagion is not only about the crisis, there is a positive contagion when things go well, too," the central banker said.

He warned governments to stick to reforms and to focus on a "combination of spending cuts and taxation" in the future, however.

With large swathes of Europe still in recession and expected to return to growth only later this year, the ECB governing council decided to keep the key interest rate at a record low of 0.75 percent.

For his part, EU Council chief Herman Van Rompuy in Dublin on Wednesday also spoke of a "lag" between the real economy and financial markets.

Employment lags even further behind, with high jobless figures to improve only when the real economy is back to solid growth, he noted.

Draghi pointed out that the ECB's "mandate is not full employment, like the Fed [the US central bank], it's price stability." He added: "But we do take it into account in the overall assessment of the situation."

Over a quarter of the working population and more than half of young people are currently out of a job in Greece and Spain, with Cyprus and Portugal also posting record job losses in recent months.

For ING Bank economist Carsten Brzeski, the positive spin sounds like a co-ordinated PR effort by EU institutions.

"Draghi sounded positive on financial markets and there was a huge portion of hope that if the situation continues to improve, it will feed into the real economy. This is more or less the EU institutions' view, the question is if they are right," he told this website.

With the ECB's hands tied on unemployment or financial stimuli for the real economy, all it can do is to "keep fingers crossed that the financial markets' magic works and it trickles down to the real economy," Brzeski added.

If it does not happen by April or May, "then we're back in trouble," he said.

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