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Mario Draghi’s timing looks impeccable. Only six weeks after pushing through quantitative easing in the face of fierce resistance from Germany, the European Central Bank president has now called time on the region’s crisis.
Mr Draghi’s message on Thursday was clear: the eurozone’s economy had, with the help of QE, turned a corner and was on the path to a meaningful recovery.
Financial and sovereign debt crises have left the bloc’s economy smaller than it was before the collapse of US investment bank Lehman Brothers almost seven years ago.
Despite geopolitical risks emanating from Greece and the EU’s eastern borders, the ECB’s economists now believe the eurozone can put the recent years of economic stagnation behind it. The central bank on Thursday signed off on growth projections of 1.5 per cent for this year, 1.9 per cent in 2016 and 2.1 per cent in 2017. That was much better than it had expected three months ago.
The ECB will only begin buying government bonds from the start of next week. But the announcement of the programme had already been enough to trigger a sharp improvement in the financial climate. “Borrowing conditions for firms and households have improved considerably,” Mr Draghi said at a press conference in Nicosia, the Cypriot capital, where the meeting of the governing council was held.
“This was Mr Draghi at his chest-thumping best,” said Marc Ostwald, of ADM Investor Services International. “He boasted of the ECB’s success in bringing down long-term interest rates and corporate lending rates even before the actual QE programme has started.”
Carsten Brzeski, economist at ING-DiBa, said: “It was the most positive and optimistic assessment in a long while. Words like broadening and strengthening have not been used in combination with the eurozone recovery for quite some time.”
Low oil prices would also help lift consumption, while QE had stamped out the threat that the fall in crude costs would trigger a vicious deflationary spiral of lower wages and a slump in the availability of credit.
While the ECB slashed its inflation forecast for 2015 to zero, its projections showed inflation on course to hit the central bank’s target of below but close to 2 per cent by 2017. Headline inflation in the eurozone is now falling for the first time in five years and the core measure of price pressures, which strips out the cost of oil and food, is at an all-time low of 0.6 per cent. Mr Draghi said the stronger recovery would boost core inflation as well.
Not everyone at the press conference agreed with the ECB’s rosy assessment of the economic outlook, however. Mr Draghi faced several angry remarks from Greek journalists, who said the ECB was not doing enough to help their country, which despite the better outlook in the region as a whole is likely to have fallen back into recession in the first quarter of 2015.
Mr Draghi challenged their claims, saying the ECB was doing plenty to help the member state most ravaged by the region’s crisis, and took the rare step of publicly revealing that the governing council had extended the amount of emergency liquidity assistance provided to Greece’s banks by €500m. The details of extended loan agreements are shrouded in secrecy, with the central bank rarely revealing the terms of the emergency loans.
The ECB president also reiterated the central bank’s position that it would consider accepting Greek government debt at its regular operations once it became more likely that the Syriza-led government would successfully complete its bailout programme.
Chrystalla Georghadji, governor of the Central Bank of Cyprus, which is also in a rescue programme, said what remains of the country’s capital controls, introduced in March 2013 after a haircut was imposed on Cypriot depositors, would disappear by the end of the quarter.
This article has been amended to reflect the fact that the figure in the article should have been €500m