“The risk premiums associated with fears about the euro's reversibility are unacceptable and need to be addressed substantially. The euro is irreversible”. Clear and explicit, the message of the European Central Bank's monthly bulletin for August puts the words of the ECB President Mario Draghi's last speech on paper. There is no turning back from the single currency. “The Governing Council may consider implementing further unconventional monetary policy measures as necessary” to reduce the “fragmentation of financial markets” that “hinders the effective functioning of monetary policy”. But these will be announced "in the coming weeks".
But in the meantime"policy makers economies in the euro area must continue with great determination the consolidation of public finances, structural reforms and the construction of the European institutional framework“. “Governments,” the note continues, “they must be ready to activate the EFSF/ESM in the bond market in case of exceptional circumstances in financial markets and risks to financial stability, in compliance with strict and effective conditions in accordance with the established guidelines". Thus Draghi's invitation from last week is reiterated.
The data emerging from the Bulletin are not very encouraging. Economic growth in the euro area “remains weak in a context of persistent tensions in the financial markets and greater uncertainty weighing on the climate of confidence". In Europe at 17"the unemployment rate continues to rise" in June it stood at 11,2%, an increase of 1,2 percentage points compared to the same month of 2011. The youngest are always affected the most. And for the third quarter, "the surveys point to further job losses, at a sustained pace, both in industry and in services".
For inflation, “Eurostat's flash estimate indicates that annual HICP inflation in July was equal to 2,4% in the euro area”, unchanged compared to the previous month. “Based on the current prices of futures contracts for oil”, explains the note, “inflation should fall further in the course of 2012, to return below 2 per cent the following year.
The underlying pace of monetary expansion remains subdued. On a year-on-year basis, M3 growth was 3,2% in June, slightly higher than the 3,1% in May. Instead, as regards loans to the private sector, the index fell to 0,3% in June, from 0,5 in May. The moderate expansion of loans mainly reflects the current economic situation, the greater aversion to risk and the adjustment underway in the balance sheets of households and businesses, all elements which affect the demand for credit.
Yet looking back, progress has been made in recent years. “From 2009 to 2011, euro area countries reduced, on average, their deficit-to-GDP ratio by 2,3 percentage points and the primary deficit improved by around 2½ percentage points. In the euro area, the rebalancing of public finances is continuing”. Furthermore, "unit labor costs and current account trends have begun to undergo a correction process in most of the countries hard hit by the crisis", but, the note concludes, "it is now crucial that the Member States apply with determination the specific recommendations for each of them".
Read complete bulletin on the ECB website
