Europe Economy Coming Back? Or, Just More 'Green Shoots'?

by: John M. Mason

Summary

The Trump administration is picking on the European Union claiming that the "weak Euro" is an effort to "exploit" the United States.

The latest figures released by the community points to stronger economic growth and some pickup in inflation, although the increase in inflation may be temporarily caused by high energy prices.

Hopes are for recovering EU economy so that the European Central Bank can end its quantitative easing and allow its interest rates to rise again coming into sync with the US.

The news coming out of Brussels relating to the economic growth of the European Union is good.

Year-over-year growth of the EU is 1.8 percent for the fourth quarter of 2016.

"Inflation across the currency zone rose to 1.8 percent in the year to January, up from 1.1 percent is December on the back of a sharp rise in energy prices." The target for inflation of the European Central Bank is 2.0 percent.

These numbers were achieved in spite of "the political uncertainty sparked by Britain's Brexit vote and the election of Donald Trump in the US."

Why these numbers seem to be important at the moment is that they raise questions about the possibility that the European Central Bank might reverse, or at least back off from the monetary policy it had been following over the last several years of extraordinarily low… or even negative… interest rates and quantitative easing.

The possibility that the current stance of the ECB might be changed spills over into the political area as Trump agents begin to beat up on EU members for "using weak Euro to exploit US."

The extremely weak European economy has certainly been a cause for the ECB to follow a policy of monetary easing, but the weak European economy has not been the only area of the world facing such problems and attempting to pursue policies of monetary ease and currency depreciation to help avoid a worse economic situation and to get their economies growing again.

Furthermore, the ECB actions were not aimed specifically at the United States. The situation was just one of economies being "out-of-sync" with one another.

Now, however, several of the economies of Europe seem to be showing some signs of life and this is very good news.

A year-over-year growth rate of 1.8 percent is not the greatest performance, but it does indicate that things may be getting better. And, a growth rate of 1.8 percent is not that much worse than the 2.1 percent compound rate of growth the United States has achieved for its economy during the recent recovery from the Great Recession.

However, there is a ways to go. Hopefully, the rate of growth of the economy will continue to rise.

The jump in the inflation rate, however, seems to be just a short-run bounce caused by the increase in energy prices. Inflation is expected to decline in the EU through the spring as the impact of the higher oil prices declines.

Core inflation, which excludes energy and food prices, stayed constant at 0.9 percent.

This is an important factor because Mario Draghi, the president of the European Central Bank, has argued that there would have to be a "sustained adjustment in inflation" before the ECB could back off its policy of quantitative easing.

If the increase in inflation in January is just a result of a short-run bump in energy prices, then the "sustained adjustment in inflation" will not be seen.

Thus, it would be a little longer for the ECB to loosen up on monetary policy and encourage interest rates to rise.

That means that the most likely interest rate scene for 2017 will still be for the Federal Reserve to raise its policy rate during the year while the ECB will keep rates constant maintaining its current stance of quantitative easing.

This will mean that there will be continued pressure for the value of the US dollar to rise against the Euro. This will not be a European effort to "exploit the US" but just the relative position of different economies.

It is good that the economic growth of the EU has picked up and, hopefully, it will continue to do so.

The problem is that the overall pickup is not being shared equally across the board. There are still weak spots in the union, Italy being one that is raising a log to concern. The Italian banking system still has "bad loan" problems… but, then, the whole European community faces "toxic loan" issues. And, there is still Greece to deal with as well as one or two other "weak spots."

The European Union seems to be picking up economic steam and this is very good. But, the European Union cannot be picked on as the "bad guy" by the United States just because its monetary policy has resulted in a weak Euro. And, continued bullying by the Trump administration will not help the situation, especially given all the other issues that the community has to deal with.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.