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Spain Outperforming Euro Area Boosts ECB’s Case for Reforms

Photographer: Martin Leissl/Bloomberg

European Central Bank President Mario Draghi has urged governments to complement monetary and fiscal policy with structural reforms to bolster a euro-area economy that stagnated in the second quarter and is vulnerable to geopolitical risks. Close

European Central Bank President Mario Draghi has urged governments to complement... Read More

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Photographer: Martin Leissl/Bloomberg

European Central Bank President Mario Draghi has urged governments to complement monetary and fiscal policy with structural reforms to bolster a euro-area economy that stagnated in the second quarter and is vulnerable to geopolitical risks.

Mario Draghi’s calls for structural reforms in crisis-hit countries are finding support in economic data.

Gauges of manufacturing and services activity in Spain and Ireland, where governments have boosted competitiveness in exchange for bailouts, showed accelerating growth in August, while indicators for Italy and France pointed to contraction, Markit Economics said today. A composite index for the 18-nation euro region fell more than initially anticipated to the lowest this year.

The European Central Bank president has urged governments to complement monetary and fiscal policy with structural reforms to bolster a euro-area economy that stagnated in the second quarter and is vulnerable to geopolitical risks. His words reignited a debate on the austerity policies that most countries adopted in the aftermath of the debt crisis, before policy makers gather tomorrow to decide whether new measures are needed to prevent deflation.

The ECB's Options to Aid the Economy

The “impressive performances” of Spain and Ireland will encourage Draghi to “stress that recoveries in other countries are being held back by the lack of successful structural reforms,” said Chris Williamson, chief economist at Markit in London. “In the absence of governments taking tough measures to boost competitiveness and productivity, economic performance will remain disappointing even with further ECB action.”

The euro rose after the report and traded at $1.3146 at 10:31 a.m. Frankfurt time.

Manufacturing, Services

A Purchasing Managers Index for both manufacturing and services in the euro area dropped to 52.5 in August from 53.8, according to today’s report. That’s the lowest level since December and falls short of an Aug. 21 preliminary reading of 52.8. A reading of 50 indicates expansion.

The absence of growth in the region and its three biggest economies, paired with signs that inflation expectations are becoming unhinged, has rekindled a debate on quantitative easing, a policy the ECB has long avoided. While economists say chances for large-scale asset purchases this year have increased, they also say policy makers won’t rush a decision.

Any policy announcements will be guided by new economic forecasts due tomorrow. In June, when the ECB presented an historic stimulus package that included a negative deposit rate and targeted long-term loans to banks, it predicted growth of 1 percent this year and 1.7 percent in 2015.

Growing Faster

“We expect euro-zone growth to remain flat for most of the second half of the year,” said Christian Schulz, senior economist at Berenberg Bank in London. “The former crisis countries look set to continue their rebound, however, and any easing of the crisis could quickly lead to a confidence rebound in Germany as well.”

Two years after applying for a European Union rescue, Spain is set to outperform the euro area. It registered growth of 0.6 percent in the second quarter, and the Bank of Spain projects expansions of 1.3 percent in 2014 and 2 percent next year.

An index of manufacturing and services activity in Spain rose to 56.9 in August from 55.7, the highest since March 2007, Markit said. A gauge for both industries in Ireland, which exited its bailout program in December, jumped to 61.8 from 60.2, a level not recorded for 14 years.

That contrasts with Italy, where the composite PMI fell to 49.9 from 53.1 in July, the first time in nine months that the index has signaled contraction. The country’s economy has grown in only one of the last 12 quarters and entered its third recession since 2008 in the three months through June. A French gauge rose to 49.5 from 49.4, Markit said.

In Germany, the index dropped to a 10-month low of 53.7.

Policy Discord

Italian Prime Minister Matteo Renzi has proposed an EU summit on growth, and his French counterpart, Manuel Valls, called for more action from the ECB after Draghi said he sees “leeway to achieve a more growth-friendly composition of fiscal policies.” German Finance Minister Wolfgang Schaeuble has said that deficit-fueled growth leads to economic decline, signaling discord between the governments of Europe’s largest economies.

While the euro area’s economy is likely to have seen renewed expansion in the third quarter, the pace of growth is down to the weakest seen so far this year, according to Markit’s Williamson.

“The euro-zone economy is defying expectations of gaining momentum, which will no doubt add to calls for the ECB to embark on full-scale quantitative easing,” he said. “However, it is likely to be too early to see anything other than firmer rhetoric from the ECB.”

To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net

To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net Jana Randow, Kevin Costelloe

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