Euro Economy Tarnished by Greek Crisis Savors Stimulus Tailwind

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If it weren’t for Greece, Mario Draghi might have had reason to cheer this week.

The European Central Bank president, confident two weeks ago of “gradual reflation” in the euro area, will probably see evidence of that on Tuesday with data showing a second month of annual consumer-price gains. The economy is in its longest growth spurt since the 2008 financial crisis and about to start the second half of the year with a tailwind of stimulus.

Overshadowing that outlook is the escalating crisis in Greece, which has pushed the country closer to a financial collapse and an exit from the currency bloc. With no new deal to replace the bailout that expires hours after the inflation data, and the European Central Bank freezing the level of emergency aid available to banks, the country closed lenders and imposed capital controls.

“The euro-zone economy was on the path of sustained recovery,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “You’re going to see some impact on confidence. Exactly how much depends on exactly what happens next and how long it lasts, which is obviously quite uncertain.

The latest developments in Greece weighed on the euro, which fell 0.7 percent to $1.1086 as of 10:28 a.m. London time. The Stoxx Europe 600 Index tumbled 2.2 percent.

Growth Momentum

The ECB said it’s working closely with the Bank of Greece to maintain financial stability after it kept Emergency Liquidity Assistance for Greek lenders at the level decided on Friday. The Governing Council ‘‘stands ready to reconsider its decision” and will use all instruments available, it said.

Business surveys suggest the euro-area economy is poised to complete its ninth consecutive quarter of growth on Tuesday. In reports last week, a combined index of manufacturing and services from Markit was at the highest in more than four years, while ECB data showed bank loans to companies and households rose the most in more than three years in May.

There are weak spots, however. An index of euro-area economic confidence slipped to 103.5 in June from 103.8, the European Commission said on Monday. In Germany, Ifo business sentiment fell for a second month.

“We’re seeing the hallmarks of a recovery gaining momentum,” said Lena Komileva, chief economist at G Plus Economics in London. It’s “still very fragile and vulnerable to systemic shocks.”

Inflation Outlook

Inflation has also returned to the euro region, with a positive reading in May after four months of falling prices. It was probably 0.2 percent in June, according to the median forecast of 41 economists, none of whom predict a drop. The European Union’s statistics agency will release those data with the region’s jobless rate at 11 a.m. in Luxembourg on Tuesday.

While inflation may stay weak for the next few months, Draghi told lawmakers in Brussels on June 15 that it is likely to accelerate toward the end of 2015.

“We remain prudently confident that all economic and monetary conditions are in place to support a gradual reflation of the euro-area economy,” he said.

If it turns out that way, it’s an outcome the ECB president is likely to claim some credit for after devising and delivering a quantitative easing program to ignite the economy and ward off the threat of deflation. Officials are spending as much as 1.1 trillion euros ($1.2 trillion) on securities until September next year to stimulate consumer prices.

“It’s a bit too early to attribute this turnaround to the ECB’s actions, because I think the monetary lags have been longer than we’ve had so far,” said Peter Dixon, an economist at Commerzbank AG. “But policy is clearly pushing in the right direction.”

Greek Distraction

A constant distraction to the ECB’s efforts has been Greece, which has been locked in confrontation with it and other creditors since February.

Markit said in its report that for now the euro economy is weathering the crisis “relatively well.” The Bank of Spain has just raised its growth forecast for 2015, predicting 3.1 percent expansion, while economists predict jobless data from Italy on Tuesday will show a drop to 12.3 percent, down from a record-high 13 percent in November.

The current situation is “less scary” for the euro-area economy than in 2011-2012 -- when the Greek debt crisis helped push the region into a slump -- because the bloc is in a better position to deal with it, according to Kounis.

“Our base case is that Greece will go back to the renegotiating table,” he said. “I would not expect the economy to fall back into recession at this stage. If this is a pothole or something that restrains growth, it should be something that is relatively temporary. The economy should regain its footing.”

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