Switching into high gear

The European Central Bank (ECB) took its monetary support for the eurozone to a whole new dimension on 22 January 2015 when it finally opted for large-scale securities purchases, including sovereign debt. The launch of a plain quantitative easing programme and the success of its latest long-term refinancing operation triggered a considerable increase in liquidity flows in March, which maintained downward pressure on the euro and bolstered the rebound in economic indicators and lending. As spring approaches, the Economic and Monetary Union finally seems to be on the verge of recovery.


The eurozone economy has rarely benefited from so many support factors: massive liquidity injections; a weaker currency, which is favourable for exports; an oil bill cut by a third, which could save as much as EUR 100 billion in 2015, and a European policy that promotes investment (the Junker plan) and a less strict interpretation of the Stability and Growth Pact. After seven years of crisis, including more than three in recession, the Economic and Monetary Union (EMU) finally seems to be on the verge of recovery.


The eurozone is getting back on its feet
The European Commission and the European Central Bank (ECB) have revised upwards their economic growth forecasts. Our own scenario calls for growth of nearly 2% in both 2015 and 2016. At this pace, unemployment would decline and credit would pick up again, two developments confirmed by recent surveys. In January, the majority of eurozone banks reported an increase in private sector loan demand, notably from the business sector. This is exactly what the ECB is trying to accomplish via its non-conventional monetary policy, comprised of quantitative easing and long-term refinancing operations. Supported by loan momentum (and no longer by loans outstanding), as well as by virtually zero interest rates, these policies have met with their first success. In March, the ECB allocated nearly EUR 100 billion euros in liquidity alongside its expanded programme of securities purchases. Switching into high gear has had a very positive impact, and not only on the equity markets. Long depressed, the main M3 money supply aggregate returned to an upward trend (see chart). In the southern EMU countries, bank debit rates began to decline.


For those who are willing to admit that inflation is above all a monetary issue, and not just a matter of oil prices, these trends are encouraging. They refute deflationist theories and underscore the transitory nature of the drop in prices. We see no grounds to conclude in the diffusion of second round effects, which tend to pull down wages across the board. Wage growth is holding to a feeble but rising slope, and seems to be hit by a kind of inertia instead. Based on the strong rebound in retail sales earlier this year, negative inflation rates are above all fuelling purchasing power gains and an upsurge in consumption.