My Daily Column: Euro Area – Elements for a recovery

Every morning I record a podcast in French (see here) on a specific topic. The text below is the translation of this morning podcast.

The combination of a more competitive euro, an oil price at $ 70 and a proactive monetary policy will be strong support for an economic improvement in the Euro zone.
For now, this situation is not good. Surveys like PMI/Markit show a fragile dynamics, while in the same time, consumer confidence is bending on the downside.

The fall of the euro will have two effects
First it will restore European companies’ competitiveness. Given their recent performances, France and Italy will benefit more because of their current poor exports’ performances.
A lower euro will ease the export of efforts that has been done to improve competitiveness in different countries. I think of Spain. The fall of the euro will facilitate the export of these gains, especially if the euro against the dollar slides towards 1.2 rapidly.
Each country will receive an impetus that will give a boost to its production and will allow the implementation and the convergence to a more homogeneous cyclical dynamics within the area. Since they trade a lot one with each other, the business cycle will rapidly improve. An acceleration of activity effect should result from this complementarity.

The decline in oil prices will improve business margins and restore households’ purchasing power. Since the beginning of the year the oil price fell by almost 30% in euros. The downtrend is very recent and it will gradually be perceived in the purchasing conditions.
Such a decline in the price is a significant transfer of producer countries to consumer countries. This will improve the internal dynamics of the economies of the area and will complement the impulse linked to the decline of the euro.

The third aspect is the very accommodative monetary policy for a long time period associated with a transfer of risk from the banking system to the ECB. This will lower the risk premia and improve credit conditions in all countries in the Euro Area. Here too a relay can be taken that will emphasize the other two elements mentioned.

This 3-dimensional combination should result in a more robust trajectory of the economy of the Euro zone. However, we must avoid at all costs a negative shock that would destroy all as it was the case in Japan with the VAT rate increase

These elements will facilitate private sector adjustment. It was time because the private sector has been constrained thus limiting the ability to rebound in the economy of the Euro zone.
A stronger private sector is always a condition for a long lasting recovery; currently the conditions tend to be met for it

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