Cheap oil. A weak euro. Money printing by the central bank.
The eurozone is so awash in stimulus that a rate increase by the US Federal Reserve is not likely to create many ripples on the continent, economists said.
The larger question for Europe is why the eurozone’s economy is not responding more to the help it is getting not only from its own central bank but also, inadvertently, from the US Fed.
The prospect of higher interest rates in the US, along with efforts by the European Central Bank (ECB) to push down rates in the eurozone, has already prompted investors to sell euros and buy US dollars.
For much of the year, in large part because of the US Fed, the euro has hovered near lows last seen in 2003. That is a boon for European exports because it makes products priced in euros cheaper for foreign buyers.
However, because the US Fed has signaled its intentions so clearly, not much is likely to change for the eurozone unless there is a surprise — for example, a statement by the US’ central bank pointing to faster interest rate increases than investors are expecting.
“The prospect of the [US] Fed raising rates and the ECB easing policy in December has been fully priced in by currency markets,” Berenberg Bank chief economist Holger Schmieding said in an e-mail.
The euro was trading at US$1.10 on Tuesday, down from US$1.25 a year earlier.
The US Fed is expected to raise rates for the first time in nearly a decade because the US economy has achieved modest, but steady growth and unemployment is within the range considered de facto full employment in the US job market.
That is in sharp contrast to the eurozone, where joblessness remains high and economic growth is still sluggish, despite everything the ECB has thrown at it.
Growth in the 19 nations of the currency zone is expected to be just 1.5 percent this year, ECB forecasts show. Unemployment in October was 10.7 percent.
The eurozone does have some forces that should work in its favor. Besides having an attractively weak currency, the eurozone economy has been given a slight lift from lower energy prices, which give consumers more money to spend on other things.
And the European Central Bank has been buying government bonds and other assets, a form of money printing that has helped reduce borrowing costs for companies and individuals.
Fears that higher interest rates in the US could spread to Europe have not materialized.
All those factors, taken together, are the economic equivalent of performance-enhancing drugs.
ECB president Mario Draghi on Monday said during a speech in Bologna, Italy, that stimulus measures “are producing their desired effects.”
However, the effect has been muted by too many negative factors, economists said, and US Fed action is not likely to change that. Draghi also said on Monday that monetary policy alone “cannot bring lasting prosperity for our economies.”
The eurozone is still recovering from the effects of the global financial crisis that began in 2007, followed by the Greek debt crisis. Many banks are still weighed down by problem loans, which discourage them from issuing new loans to finance business expansion and hiring.
Schmieding estimated that the cheap euro, the main side effect of US Fed policy, adds just 0.1 percent to eurozone growth.
That only partly offsets the negative effect in Europe from turbulence in developing nations like China, which are important customers for eurozone exports like cars and luxury goods.
“The exchange rate is always a secondary factor,” Moody’s Marie Diron said. “What drives exports really is demand. Cheap doesn’t help if the demand isn’t there.”
The US Fed is partly the cause of the emerging market turbulence. Investors are less willing to gamble on developing nations like South Africa and Turkey when they can earn a reasonable return in the US, with less risk.
However, many of the problems in emerging nations stem from decisions made by their own governments. Slower growth in China was caused in part from over-investment in steel factories and other industries, along with a bumpy shift to an economy based more on consumer demand.
As a result, businesses in Europe remain cautious — even in strong countries like Germany.
At first glance, Germany would appear to have all the elements for a boom. Credit is cheap and plentiful. Unemployment, at 4.5 percent, is less than half the eurozone average and lower than in the US. Germany’s many export companies benefit from the devalued euro.
And yet on Tuesday a survey of midsize companies in Germany showed that managers were more pessimistic than six months earlier.
Stefan Bielmeier, chief economist at DZ Bank in Frankfurt, which conducted the survey with two other banks, said that company executives were worried not only about China, but also about economic instability in Russia, war in Syria and the influx of refugees and migrants into Europe. US Fed policy is barely on their minds.
Bielmeier said he expected next year’s eurozone growth to be 1.5 percent, worse than this year.
“Where are the impulses?” he said. “We have already have had strong stimulus for a long time. Yet growth is still moderate.”
Italian business group Assonime director-general Stefano Micossi said that eurozone leaders had failed to address some of the problems that hold back growth in the eurozone.
Italy and France have not done enough to make their economies more competitive, he added.
In his view, ECB stimulus measures, including monthly asset purchases of 60 billion euros (US$66 billion) and a benchmark interest rate of only 0.05 percent, have merely dulled the pain of Europe’s underlying problems.
“We are fully under the influence of morphine,” Micossi said, warning that Europe’s problems had yet to be fully felt.
“The tensions are still underwater,” he added. “They are likely to emerge at some stage.”
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