World Economy

Eurozone Swimming Against the Tide

Eurozone Swimming Against the TideEurozone Swimming Against the Tide

It is claimed hope springs eternal, but confidence can be a very fickle thing. Sure enough, when things are going well it is all too easy to be swept up in the euphoria and end up detached from reality. In the case of the eurozone economy, the optimists are in for a rude awakening.

European economic confidence surveys might be pointing to better times ahead, but with the rest of the world drowning in pessimism right now, the eurozone looks very exposed and swimming against the tide, Yahoo reported.

Headwinds are blowing hard from all quarters. China’s economy is slowing down, the US Federal Reserve remains hell-bent on tightening policy, energy and commodity prices are in deep descent, and financial markets are threatening to descend into chaos again. The omens are deeply disturbing.

With the global economy under duress and deflation risks still on the rise, it is unlikely to be too long before Europe’s leading indicators begin to waver and point the way towards slower growth ahead.

Right now, Europe’s economic sentiment index, Germany’s IFO business climate index and the eurozone purchasing managers’ survey are taking their cue from the super-stimulus generated by the European Central Bank’s quantitative easing program. The surveys anticipate the eurozone becomes so flooded with liquidity that self-sustaining recovery eventually kicks in.

QE measures have had some positive effects, with eurozone monetary indicators showing definite hints of stronger activity. Loan demand has picked up and money supply growth is accelerating too. Consumer credit, mortgage borrowing and corporate loans are all back in positive growth territory again, albeit from a very weak base in recent years.

The distressed eurozone economies, especially in southern Europe, remain plagued by dangerously high unemployment levels and weak consumer demand.

The pace of M3 money supply growth has even shot up to 5.1%, above the ECB’s 4.5% growth reference target. This is fastest rate of monetary growth in the eurozone for seven years.

Monetary conditions might have improved on the surface, but problems still persist. Recent ECB loan surveys show net credit conditions have hit their tightest level since the before the global financial crisis kicked off in 2008. Despite the availability of cheap money from QE, eurozone banks are still struggling to lend freely under a regime of much tougher capital adequacy requirements being applied to European bank balance sheets.

If the global economy spins into a downward spiral and Europe’s banks feel the pinch, the flow of easy credit to the markets will dry up again.