Draghi cheerleads for economy as Greek risk looms over euro area

Mario Draghi can gauge this week whether his optimism in the economy is well-founded.

From business confidence in Germany to manufacturing in France and consumer spending in Italy, a smattering of data from across the 19-nation euro area will provide a glimpse at the state of the recovery. The European Central Bank president, who has become more upbeat on the economy since announcing his quantitative-easing program two months ago, will get a chance to present his view on Monday when he addresses the European Parliament in Brussels.

His words will come only days after protesters vented their anger outside the ECB’s new headquarters in Frankfurt over the institution’s perceived role in imposing fiscal austerity and economic hardship throughout Europe. With unemployment still near record highs and strong support for populist parties like Greece’s Syriza threatening to tear apart the currency bloc, pressure is building on Draghi to ensure that monetary stimulus reaches beyond banks’ balance sheets.

“Draghi will continue to cheerlead the effects of the ECB’s QE but warn that you need reforms to make the recovery extended and long-lasting,” said Thomas Harjes, senior European economist at Barclays Plc in Frankfurt. “There is still a significant amount of discontent in states that saw a surge in unemployment, and for this to change you really need a turn in employment dynamics.”

Optimistic outlook

Since pushing through his 1.1 trillion-euro ($1.2 trillion) bond-buying program against German-led opposition, Draghi has been striking an uncharacteristically upbeat note about the euro area’s economy.

“A sustained recovery is taking hold,” he said on March 16. “We can rightly be optimistic about the outlook.”

Data this week may bolster his case. On Monday, consumer confidence in the currency bloc will rise to the highest level in 7 1/2 years, according to a Bloomberg News survey, as cheaper oil pushes down prices and boosts spending. A day later, purchasing managers indexes will show manufacturing and services activity expanding across the region.

Business confidence in Europe’s largest economy, as measured by the Ifo institute, is slated to increase for a fifth straight month, according to a separate survey before data on Wednesday. Italy will report industrial orders and retail sales on Friday.

The ECB has already revised up its economic outlook. Provided monetary stimulus is implemented in full, growth will accelerate from 0.9 percent last year to 2.1 percent in 2017 — a pace of expansion the region hasn’t seen since 2007.

Political risks

In a sign that euro-area banks share policy makers’ optimism, they took out 98 billion euros of the ECB’s long-term loans last week, more than twice the amount forecast. Analysts say the unexpectedly high interest reflects banks’ expectations that credit demand is picking up. Data on Thursday may show lending to companies and households increased in February for the first time since 2012.

As the economic outlook brightens, politics remain fraught with risks.

European lawmakers will probably quiz Draghi not only about the boons and potential pitfalls of his QE program but also about his institution’s stance on Greece.

The country is on the verge of running out of cash as bailout negotiations with European creditors drag on. Amid concern about endangering political progress, the ECB rejected a proposal by its supervisory arm to prohibit Greek banks from increasing their holdings of short-term government debt.

Austerity protests

Draghi will also address the Italian parliament this week, where lawmakers are looking to discuss topics including the country’s failure to return to growth and stubbornly high unemployment.

In his home country, as in France and elsewhere across the continent, support for parties of different stripes calling for a breakup of the euro and a return to national currencies is on the rise. Draghi witnessed some of the discontent behind this surge in his own backyard on March 18, when protesters set cars on fire and hurled stones at police during the official inauguration of the ECB’s new premises.

While Draghi took note of protesters’ demands and motives, he said that neither retrenching behind national borders nor demanding unconditional European solidarity are viable solutions. Instead, he urged governments to make use of improved economic prospects and carry through with reforms.

“The economic outlook for the euro zone has not been as good as it is now for years,” said Christian Schulz, senior economist at Berenberg Bank in London. “But serious risks, stemming particularly from politics, remain and can still delay the recovery.” [Bloomberg]

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