Euro Area recovery Has Lost Some Momentum

While Euro Area bankers are cheering on the end of deflationary pressures, it might be too soon for celebrations after European Central Bank President Mario Draghi warned on lower growth expectations for the outlook, reflecting similar remarks released earlier from the Organization for Economic Cooperation and Development (OECD) which is presently anticipating growth of 1.40% in 2015 for the common currency. Despite the uptick in inflation and improvement in Euro Area employment which fell to 11.10% for the aggregate region, growth expectations have been revised lower to 2.00% from 2.10% for 2017. Inflation prospects remain unchanged, highlighting the success in staving off the deflationary forces that were encircling the economy however, this could shift the time frame for quantitative easing which is due to run until September of 2016. Should inflation actually reach levels targeted by the Central, it could beckon policy tightening in contrast to existing loose monetary policies.

 

This negates the obvious risk factors looming over the outlook like Greece and the enduring levels of unemployment which remain elevated. The other major problem is that the ECB has no exit strategy. While much has been made in recent months of the Federal Reserve’s future and how it will pare down the balance sheet, today’s comments evidenced that the ECB is entering completely unchartered waters and is not prepared for quantitative easing to be an overwhelming success if they have no idea of how to exit. This is a major gaffe from the perspective that admitting they do not know the future of policy makes them look foolish whilst destroying confidence in the promises of the Central Bank. The Euro has thus far responded favorably to Draghi, bouncing after a brief bout of weakness following yesterday’s exuberance. But risks remain skewed to the downside as Greece remains a loose end that could shake the foundations of the monetary union.