The Eurozone has underperformed amongst the major economies

The Eurozone has underperformed amongst the major economies. Europe is slowing on the back of weak industrial and trade data. Germany, which is dependent upon trade, is at risk of falling into a technical recession due to its exposure to the auto industry and the global manufacturing cycle. Other European countries have seen growth weaken but have held up better than Germany. Analysts are now looking to France to drive European growth. The French stock market has had an impressive year with the Paris CAC 40 rising 24.8% since January 1st equalling the 25% rise in the DAX Index in Frankfurt. Some overall good news for the Eurozone is that employment figures are steadily improving. Unemployment currently stands at 7.4%, the lowest for 19 years.

Perhaps this year’s most important development in the Eurozone was taken by the European Central Bank (ECB) in September. Outgoing President Mario Draghi announced the resumption of its asset purchasing programme. The ECB is now purchasing €20bn per month of Eurozone sovereign bonds. The renewal of its QE policy, that only ended last December, was implemented along with a -0.1% cut in interest rates to -0.5% and the introduction of tiering rates to protect the finances of Eurozone banks. The tiering of deposit rates allows Eurozone banks to avoid the penalty of negative interest rates on their ECB deposits and to encourage lending.

Just as with previous rounds of QE, this asset swap between the ECB and Eurozone banks may not deliver new cash into the hands of businesses and households to spend at the levels desired. Some analysts are suggesting that these measures will not kick start the economy as efficiently as they could and that this is why the ECB has had to re-start QE again because it was not sufficiently successful the first time.

Reducing interest rates to negative levels has not stimulated growth as it does not encourage banks to increase lending levels significantly because there are very small profit margins with ultra-low or negative interest rates. Negative interest rates also have an impact on house prices, savings rates, savings levels and insurance company and pension fund liabilities. Critics of the ECB policy suggest a better way to stimulate growth is to use QE to purchase non-banking sector bonds providing companies with cash directly to spend and invest. The QE programmes in both the US and UK have been more successful at stimulating growth.

The European economy has slowed and the ECB has only limited options to create growth. If there is a recession in Europe or a fresh euro crisis sparked off by sovereign debt levels, then the ECB and Christine Lagarde, the new incoming President, will be challenged.

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