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Sunny optimism dispels Brexit blues at ECB’s Sintra pow-wow

When the eurozone’s top central bankers met in the plush Portuguese resort of Sintra last year, the outlook was bleak.

Days after the Brexit vote, participants at the European Central Bank’s flagship conference feared the UK’s decision to break ties with the EU was a harbinger of a broader wave of anti-establishment sentiment in Europe. That sentiment threatened a recovery that was then still weak.

A year on, the mood could barely be brighter. Cautiously optimistic in the spring, Mario Draghi, ECB president, now sounds positively bullish. The financial markets smelt exuberance in his speech on Tuesday. The euro and bond yields whipsawed as investors interpreted his words as meaning the central bank would begin to phase out its crisis-era policies sooner than expected — only to be informed otherwise the next day.

Mr Draghi may have chosen his words better, but there is much cause for bullishness. Economic figures, from the hard data on growth and unemployment to indicators of sentiment, have been solid for several quarters.

The most important number, though, in instilling confidence comes from the political sphere: 308 — the number of seats President Emmanuel Macron’s République En Marche managed to secure out of a total of 577 in France’s parliamentary elections.

That Mr Macron has not only defeated Marine Le Pen but secured a majority has reassured eurozone policymakers that Europe’s centre can hold. “For years, the euro area has lived under a cloud of uncertainty about whether the necessary reforms would be implemented at both the domestic and Union levels,” Mr Draghi said on Tuesday. “This acted as a break on confidence and investment, which is tantamount to an implicit tightening of economic conditions. Today, things have changed. Political winds are becoming tailwinds.”

In Sintra, the hope was that a majority in the French parliament will give Mr Macron a strong enough mandate to pass the labour reforms many regard as crucial to the long-term health of the region’s second-largest economy. That might in turn encourage Berlin to back Mr Macron’s vision of a more centralised eurozone — a vision shared by most, if not all, of the bloc’s central banking elite.

Contrast that with the mood in the US. Former Federal Reserve chair Ben Bernanke delivered a stinging assessment of life under Donald Trump, arguing that his proposed policies would do little to help those who had secured him the presidency. “Ironically, it may be that the most rhetorically populist president since Andrew Jackson will, in practice, not be populist enough,” Mr Bernanke said.

While growth in the US falters, the eurozone’s recovery has been the surprise economic story of the year. It has gained in strength and breadth to a point where every single one of the 19 member states enjoyed an economic expansion in the opening months of 2017.

Not only has the ECB defeated the threat of deflation, its president is now reassured that the damage caused by the crisis would not inflict permanent scars on the region. Growth and jobs would be restored, he said on Tuesday, and inflation would, eventually, come into line with the central bank’s target of just below 2 per cent. There was “newfound” confidence and support for European cohesion and reforms, helping to unleash demand and investment. Monetary stimulus would be withdrawn, albeit “prudently” as financing conditions in the region reflected the strength of the recovery.

A combination of cheap and easy credit, low-cost oil, a weaker single currency and less austerity have helped power a recovery that continues to outpace that of the UK and the US. With Mr Macron in charge, Mr Draghi clearly believes that things will get better still.

Though officials close to the political process have drunk the Macron Kool-Aid, others are more sceptical. Angela Merkel is considered a likely winner in Germany’s federal elections in September, but a coalition with the liberal FDP — as opposed to the more pro-European SPD — would leave the Chancellor with much less room for manoeuvre to support Mr Macron’s push for integration.

And there is still an elephant in the room: Italy. Last year, its banks’ shares dropped sharply in the wake of the Brexit vote. This time around there were many sharp words on the handling of the bailout of the Veneto banks.

This episode displayed the limits of Europe’s attempts to enforce economic and financial integration on member states, with the “spirit” of new rules to protect taxpayers in a banking union flouted, according to one delegate. Another decried the fact that it had taken so long to close two banks whose troubles had long been known, labelling it “a disaster”. “You can talk about political tailwinds, but in Italy [the question is] which bank is next? It’s still a big headwind.”