WHY THE EUROZONE ISN´T FORCING THE ECB´S HAND / THE WALL STREET JOURNAL

Why the Eurozone Isn’t Forcing the ECB’s Hand

The market’s appetite for more ECB easing won’t be sated while the economic data hold up.

By Richard Barley

ECB President Mario Draghi pictured in April. ECB officials will no doubt continue to strike a dovish tone. Photo: Bloomberg


The clamor for further easing by the European Central Bank is building again as stock and credit markets sag. But the economic data don’t offer a really compelling reason for action.

Wednesday’s survey data is a case in point. Markit’s eurozone flash purchasing managers index dipped to 53.9 in September from 54.3 in August. But that still suggests continued growth at about the same pace as in the second quarter despite fears about the chill emanating from China and emerging markets.

The average for the third quarter stands at 54.0, the highest since the second quarter of 2011, Markit noted. And some of the underlying details were positive: employment continued to rise, new orders and backlogs of work grew at a faster pace and growth outside France and Germany held up.

The one caveat: September’s flash survey hasn’t captured the events at Volkswagen VLKAY 5.62 % . While the auto maker is only one company, it is huge—with 439,000 European employees in 2014, production plants in 20 European countries, and a wealth of suppliers—and its problems could yet dent confidence, particularly in Germany.

Other indicators have also suggested continued steady progress in the eurozone: unemployment is high but fell in July to 10.9%, down from 11.6% a year earlier. Headline inflation is way off target, at 0.1%, but was hit again in August by a big drag from energy, services and non-energy goods inflation were stable at 1.2% and 0.4% respectively. And low inflation means real wages are rising. In the second quarter, eurozone real wage growth in industry, construction and services of 1.9% from a year earlier was over one percentage point higher than the average for 2000-07, ING calculates.

Meanwhile, the euro has changed course: while in recent months it has often moved in the opposite direction to stocks, rising when risk appetite falls and vice versa, that relationship appears to have broken down. On Tuesday, when the Stoxx Europe 600 fell more than 3%, the euro fell half a cent against the dollar; Wednesday it traded just above $1.11.

That may be in expectation of expanded bond purchases by the ECB but, since the euro exchange rate is the most obvious channel for central bank policy to affect the economy, the market is easing for the ECB. Bond yields have declined again across the eurozone.

ECB officials will no doubt continue to strike a dovish tone. The risks from emerging economies and financial markets are rightly reason for concern. But so far, the eurozone economy is holding up despite the headwinds.