>

ECB Sees Stronger Growth, but Not Strong Enough to Withdraw Stimulus

The European Central Bank raised its 2017 growth forecast for the European Union from 1.8% to 1.9% in a review yesterday. Growth for countries using the Euro is expected to be 1.7% versus the previous 1.6% estimate.

The ECB sounded particular optimism at the receding political and economic uncertainty that has plagued the region. Emmanuel Macron’s victory in France’s Presidential elections and more manageable deficits in peripheral countries are fuelling new found optimism. 2017 looks set to be Europe’s fifth consecutive year of GDP expansion. It is also looking increasingly likely that Angela Merkel will retain her position after a September vote in Germany.

Despite a rosier environment, ECB officials also made clear that they do not feel it is yet time to remove monetary stimulus, noting that the stimulus measures themselves have helped contribute to the improving economy. Unlike in the United States, where the Federal Reserve is removing stimulus aggressively this year, substantial slack continues to exist in the European labor market and inflation measures remain subdued. The ECB operates on a mandate of achieving price stability, normally defined as inflation close to a target of 2%.

Unemployment across the Eurozone is currently about 8% compared to 4.4% in the United States. But that rate differs widely between countries. In Germany, the unemployment rate is currently less than 4%, but in France it is more than 9% and in Italy, it is still 12%. That disparity has caused Finance Ministers to criticize ECB President Mario Draghi for setting monetary policy on the basis of weaker economies in southern Europe. Draghi has stated that his only consideration is price stability across the region.

While setting monetary policy in Europe is still not for the faint of heart, Draghi’s job is at least getting easier than it was several years ago.

more recommended stories