The ECB at this stage is probably holding its breath. Maybe, just maybe, the degree of accommodation provided so far will prove a solid enough safety net to the Euro area??£¤s budding recovery. Indeed, the pace of fiscal accommodation is slowing down, providing a breather to domestic demand, which could be further supported by the near-completion of the private sector??£¤s financial adjustment in some countries such as Spain. Solid growth in the US, the UK and China should allow net trade to continue to contribute positively to Euro area growth in spite of the stubborn strength in the euro. Beyond this cyclical impulse, the banks' clean-up brought about by the ECB"s AQR/stress test would finally unlock credit origination, crowning the recovery process. This is actually our baseline.
Still, a growth rate of 1% in 2014, as per the ECB??£¤s forecast, is unlikely to suffice to curb the accumulated output gap. There is ample literature on the difficulty to use real-time measure of slack to steer monetary policy, and just as much on the now looser relationship between the output gap and inflation. Yet, in our view we are way past the ?¡ãuncertainty margin?¡À. The European Commission, the OECD and the IMF estimate the output gap at between -2.5% and -4% of GDP for 2013.
Beyond the large size of the output gap, the decline in the estimates of potential GDP also is problematic. This is the result of the decrease in the stock of capital brought about by the fall in investment since 2008, as well as by the deterioration in human capital triggered by the rise in unemployment, while the effect structural reforms "often timid?" in the struggling countries is largely offset in our view by the particularly large increase in youth unemployment, which specifically deteriorate productivity gains on a lasting basis.
Here is a link to the report quoted above.
Without a specific mandate to foster employment or promote growth, we can expect the ECB to do what is necessary to ensure the survival of the currency union and to abide by its mandate to contain inflationary pressures.
As with other central banks, the ECB has to balance the competing interests of widely differing regions. The German economy?¡¥s manufacturing sector remains strong and which has resulted in rising wages while much of the periphery continues to labour under fiscal consolidation. This would suggest that the potential for bold policy moves is rather limited in the absence of an external shock and also suggests that Europe will need to look to governments for a concerted growth strategy.
Based on empirical evidence the ECB has been willing to extend virtually limitless credit to the banking system and this is likely to continue. In fact since at least some of money created via the Federal Reserve's quantitative easing program finds its way to Europe, the advent of tapering suggests the ECB will need to increase the amount of money it makes available to the banking system. Continued monetary accommodation and the opening up of the Eurozone's credit markets for new issues are likely to remain tailwinds for the region's stock marketsBack to top