Is the Eurozone economy recovering?
On the day that Mario Draghi, President of the European Central Bank (ECB), has announced a further loosening of monetary policy by cutting its deposit rate below zero, we thought it would be worth tackling this question on the outlook for the Eurozone economy.
The mere fact that the ECB has taken such dramatic action today suggests that not all is well in the eurozone – and I agree.
We live in an extraordinary financial policy world, where the market eagerly anticipates the idea of negative interest rates without really thinking at all about the underlying problems that make such an extraordinary policy necessary.
In my view, the market is in denial about the real plight of the eurozone economy. In less than two years, since Draghi’s original “whatever it takes” speech in July 2012, the market has swung from despair to elation about the region’s prospects. Although some economic fundamentals have improved a little since, the most significant change has simply been sentiment.
The illustration below compares the level of some European market indices and bond yields on the eve of Draghi’s speech (25 July 2012) and now (4 June 2014) to illustrate the extent of this mood swing.