Wednesday 13 December 2017

'Brave leap' necessary to save the euro, says Draghi

Call from ECB comes as economy in Germany shows signs of stuttering

Mario Draghi. Photo: Reuters
Mario Draghi. Photo: Reuters

EUROPEAN Central Bank president Mario Draghi called on governments to take a "courageous leap" of political imagination to safeguard the future of the eurozone.

In a speech in Rome, Mr Draghi said it would take time for the full benefits of the ECB's cheap three-year loans to banks to be seen, and now the onus was on banks, and especially governments, to take their own decisive action.

"We are living a crucial moment in the history of the EU," Mr Draghi said as new evidence emerged that the eurozone's private sector sank further into the doldrums this month. Key business surveys showed yesterday that private sector companies saw new orders shrivel, forcing firms to run down backlogs and slash workforces.

Worryingly for policymakers, a downturn that started in smaller periphery members is taking root in the core countries of Germany and France, whose tepid growth had been keeping the troubled bloc afloat.

"Weakening manufacturing output brought the German economy at large into mild contraction for the first time since last November," said Tim Moore, senior economist at data compiler Markit.

The eurozone composite PMI, a combination of the services and manufacturing indexes and seen as a guide to growth, fell to 45.9 this month from April's 46.7, its lowest reading since June 2009. "The survey is broadly consistent with gross domestic product falling by at least 0.5pc across the region in the second quarter, as an increasingly steep downturn in the periphery infects both France and Germany," said Chris Williamson, chief economist at Markit.


Official data showed the euro area narrowly escaped recession by stagnating in the first quarter, supported by strong growth in Germany. But a Reuters poll taken last week predicts a 0.1pc contraction in the current quarter.

The eurozone's services and manufacturing sectors both saw activity decline at a faster pace than expected despite firms cutting prices to drum up business, according to flash readings of Markit's Purchasing Managers' Indexes (PMI).

This month's flash PMI for the dominant service sector fell to 46.5 from April's 46.9, a seven-month low and missing expectations for 46.9.

May is the fourth month the index has been below the 50 line that divides growth from contraction.

Manufacturers painted a similarly gloomy picture, with a PMI reading of 45.0, the lowest since June 2009 when the bloc was mired in recession and below both last month's 45.9 and a forecast for 46.0.

The output index for the sector, which drove a large part of the bloc's recovery from the last recession, sank to 44.7 from 46.1. Earlier PMI data from Germany, Europe's largest economy, showed its manufacturing sector contracted at a far greater pace than was expected, while its service sector saw only tepid growth.

In neighbouring France, both sectors contracted faster than predicted by most economists.

"(French) PMI data point firmly towards a contraction in second-quarter GDP following stagnation in Q1," said Jack Kennedy, senior economist at Markit.

The eurozone unemployment rate hit 10.9pc in March, equalling a record high of 15 years ago, and a Reuters poll showed it peaking at 11.4pc towards the end of this year, or the start of next year.

Irish Independent

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