Investor confidence in Europe grew last week, propelling the single currency to a 15-month high of 1.35 to the US dollar. Banks repaid €137bn of loans from the European Central Bank (ECB) ahead of schedule. A net €93bn of private capital flowed into the eurozone in the last four months of 2012, partly reversing huge outflows earlier in the year.
German consumer confidence ticked up for the first time in three months, thanks to the recent calm on the financial markets. The eurozone economic sentiment indicator rose again in January. But Spanish GDP fell by 0.7% in the fourth quarter, and was 1.8% down year-on-year.
What the commentators said
Last summer, ECB president Mario Draghi said he would buy unlimited amounts of peripheral countries’ debt to keep their borrowing costs under control and prevent defaults. He hoped this would reassure investors enough that he wouldn’t have to follow through on his promise, and “so far his ploy has worked”, said the FT.
Yields have fallen, capital has returned and the wave of cash is helping governments to raise money – Spain has just sold its first ten-year paper in over a year. The hope now is that there will be “positive contagion”, stoking recovery.
Lower borrowing costs should temper the need to raise taxes and cut spending, thus underpinning growth. Meanwhile, banks should lend more once they are confident of being able to refinance their debts more easily amid calmer markets.
Don’t count on this rosy scenario, said Allister Heath in City AM. Just as markets arguably became too negative at the height of the crisis last year, they “have now overcompensated”. Some of the data coming out of southern Europe are “unbelievably grim”.
Spain’s 10.7% annual drop in retail sales mark a “disastrous, Great Depression-style collapse”. Meanwhile, the euro’s rise over the past year threatens exports – “the one source of growth for many beleaguered eurozone economies”.
So the economic outlook, especially in the south, still augurs ill for states trying to get their debt under control. Ongoing social unrest, the Italian elections and discussions over Cyprus’s bail-out package are potential sources of renewed market jitters over default.
Meanwhile, as The Economist pointed out, the positive market mood has eased the pressure for structural reforms to boost competitiveness in the periphery – crucial to cementing confidence in the future of the single currency.
Unfortunately, it may take another crisis to make progress on this front. “European policymakers only move at gunpoint,” said Citigroup’s Willem Buiter, “and the only gun around is the market.”