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Brighter economic signals – or is it the banknote printing presses creating a deceptive dawn?

29-02-2012 10:09

An appetite for risk has returned in recent times, stock exchanges and commodities prices have climbed, while at the same time, the situation on the credit market has improved somewhat in Europe. The central bank printing presses are running hot, and since the European Central Bank, the ECB, has also chosen to give its balance sheet a big boost, financial institutions have begun to breathe a bit more easily.

This is one explanation as to why sentiment has strengthened, although the agreement with Greece, signs of recovery in USA and the continued strong momentum in the developing countries have also helped.

We may need to revise growth prospects upwards for e.g. the USA and China in 2012, but the situation has barely changed for the euro zone to any great extent. The savage credit tightening already featured in the risk profile, while the main scenario included a more ordinary tightening of the credit supply in line with the shrinking balance sheets of the banks and less investment by companies. The ECB printing presses mean a worse scenario is avoided, and above all, the fear of far weaker growth has been reduced.

The crisis-struck countries in the euro zone are still going to contract in 2012, while things will go somewhat better for Germany and northern Europe will manage somewhat better. The fiscal austerity in the crisis-struck countries combined with a credit crunch and weak confidence amongst households and companies still prevail. A recession cannot be avoided. In the case of Greece, we are talking about a depression.

I take a favourable view of the ECB's actions and think the central bank has found a pragmatic way to support crisis-struck countries without breaching the EU Treaty. Providing three-year loans to banks at low interest and with lower collateral demandsmake life easier for sovereigns indirectly as the banks are investing in government bonds from these countries.

Even so, it is important that the reform work is continued and more radically. The ECB measures are buying the politicians time, but if this time is not used correctly, the euro zone will be back to square one. It is a matter of loosening up far too strict regulations on labour markets and product markets that hold back growth. It is about both private and public sectors becoming more efficient, so higher growth in productivity can help growth and relieve debt. It is a case of trying to counter the far too rapid and strong growth in unemployment, otherwise there is a risk that this will remain at a permanently high level for a long time to come.

It is remarkable that some people in Sweden are calling on Swedish banks to take out the ECB's three-year loans that are actually designed for crisis banks in crisis countries. We are not part of the Euro zone and would – even though we are in a far stronger position in the finance sector – still benefit from the loans in order to give Swedish households even lower mortgage rates, as a kind of artificial respiration. Would it not be better for the Swedish finance sector to play in accordance with the rules of the game on their own turf, to achieve greater stability and staying power, and allow those who need liquidity in the crisis hit Euro zone gain the benefits of the printing presses?


Cecilia Hermansson
Cecilia Hermansson
Group Chief Economist, Economic Research Department, Sweden


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