Insight
Is the eurozone really out of the woods? by Simon Tilford 22 September 2017
Can the eurozone avoid another crisis without further significant reforms? Much will depend on the longevity of the current upturn and the depth of the next downturn. The eurozone economy is now growing at a healthy clip. It should expand by around 2 per cent this year, following growth of about that in 2016. The IMF and the European Commission expect similar growth rates in 2018 and 2019. This is a long way from a boom, but certainly constitutes a reasonable cyclical recovery (see chart 1). There are sizeable differences in growth rates between member-states, but all, with the exception of Greece, are sharing in the recovery. Growth is also increasingly broad-based, with domestic demand – that is, consumption and investment – providing most of the impetus. Does this mean that the eurozone is out of the woods? Can it survive without further significant reforms? Much will depend on the longevity of the current upturn and the depth of the next downturn. The initial impetus to the recovery was a combination of monetary stimulus, an end to austerity, the weakness of the euro and very low oil prices. The ECB responded to deflationary pressures by holding interest rates at record low levels and launching a programme of quantitative easing (QE) so large that the ECB now has more assets on its balance sheet than the US Federal Reserve. Despite open hostility to this strategy from some national governments at times, the ECB has stuck to its guns, and deserves most of the credit for the improved economic climate. An end to austerity across most of the currency union was also a significant factor in driving the recovery, especially in Spain, but also France and Italy. It was partly helped by the ECB pushing down refinancing costs for governments. The cheap euro drove a strong pick-up in exports to non-eurozone markets, while a period of very low oil (and other commodity) prices boosted disposable incomes and hence consumption, as well as corporate profits.’
CER INSIGHT: IS THE EUROZONE REALLY OUT OF THE WOODS? 22 SEPTEMBER 2017
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