When the European Central Bank announced the end of quantitative easing in December, it was conveying a very clear message to markets and governments alike: we are approaching the end of expansionary monetary policies, so get ready for what’s coming.
That much was clear from the press release the ECB put out at the time, hinting that interest rates could start rising as soon as September 2019.
However, more recently the bank’s Governing Council seems to have backed down in its plan to tighten monetary policy. In light of the worsening economic outlook, the Eurozone’s monetary authority has made clear that it will keep interest rates at their current levels at least until the end of this year. Added to that, a new series of long-term refinancing operations starting in September will be carried out in order to give a boost to bank lending.
Are there good reasons to postpone the normalisation of monetary policy? Maybe. Several bodies have recently warned about the possibility of an economic slowdown in the Eurozone. In fact, the ECB itself has slashed growth forecasts for this year from 1.7 to 1.1 per cent. Similarly, the European Commission estimates that Germany, the so-called locomotive of Europe, will grow by only 1.1 per cent, 40 per cent lower than its previous estimate.
The Economic Sentiment Indicator (ESI), which measures consumers’ and businesses’ confidence in the economy, has been falling since 2017, and investment growth is expected to slow down in 2019.
So what is hampering economic growth in the Euro area?
Brexit is one of the reasons. There is no doubt that the UK’s withdrawal from the European Union will have a negative impact on the performance of the Eurozone’s economy, especially if hard Brexiteers win the battle and secure a No Deal exit. That would mean new tariff and non-tariff barriers on both sides of the English Channel, which would affect exporters. Without doubt that impact would be more serious for the UK, whose main trading partner is the EU.
Economic uncertainty could also be a factor influencing Europe’s slow growth. The relationship between high-uncertainty environments and recessions has been well-documented by economists. In the aftermath of political, economic and financial crises, firms tend to defer new investments awaiting new information about where the economy is going, which in turn has a negative impact on aggregate demand.
In the case of the Eurozone, the ESI index suggests that episodes like the trade war between the US and the EU, anti-government protests in France and the continuing Brexit saga have increased economic uncertainty, with a knock-on effect on growth.