ANALYSIS
NEWS
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THE INVESTOR
EUROPE
UNCERTAINTY HITS EURO GROWTH
The UK started its quantitative easing (QE) programme to boost the economy five
years ago, while the US, which was even earlier into the fray, is now in the process of
unwinding the measures. Europe, in contrast, is still holding off on full-blown QE, although
it has moved towards a halfway house with an asset-purchase programme, under
which the European Central Bank (ECB) will buy debt from its banks in the hope of
persuading them to start lending.
Economists believe that reluctance to embrace QE is one of the key reasons for the
disparity in their fortunes.While the latest forecast from the OECD estimates the UK
will grow by 3.1% this year and the US by 2.1%, it expects Europe to limp along at
just 0.8%. Even Germany, for so long the powerhouse of a weakening Europe, has
lost momentum, with GDP actually contracting in the second quarter of 2014
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The outlook is hardly encouraging.The conflict in Ukraine, which has led to sanctions
on Russia and retaliatory trade embargoes by its president,Vladimir Putin,
is likely to have an increasing impact; as its closest neighbour, Europe will suffer
disproportionately. Deflation remains a significant threat, with inflation across the euro
area down to 0.3% in August and prices already falling in countries including Greece,
Spain and Portugal
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ECB president Mario Draghi admitted that the current measures, which include
a cut in lending rates to a negligible 0.05%, as well as the asset-purchase programme,
represented a middle road between those council members who wanted more radical
action and those who preferred even less stimulus. German history suggests it is likely to
remain opposed to the kind of money-printing that the UK and US have been engaged in.
But the OECD expects political uncertainty in the Middle East, as well as Ukraine, to
take its toll on economic growth.That could make it even harder for the EU economy
to shake off anaemic growth, high unemployment and deflationary pressures.A growing
number of economists warn that more radical action will be needed; the question is if
and when the ECB will agree.
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