Europe's upward march

The euro zone could be on the road to revival

As the European Central Bank (ECB) begins its vast bond-buying programme, market participants are asking one big question: is Europe out of the woods? Certainly, the alarm that followed the election of an anti-austerity party in Greece earlier this year appears to have dissipated. While it is too soon to say if the new government will harden its position and eventually lead the country out of the European Union, markets appear to have been reassured that exit is neither imminent nor, if it comes, will be notably disorderly. In fact, few would have disagreed with ECB President Mario Draghi when, at a press conference in Cyprus's capital Nicosia last Thursday, he declared that Europe was now on the path to recovery. Certainly, Europe's economies continue to be smaller than they were in the years before the 2008 fall of Lehman Brothers; the financial crisis - and the sovereign-debt crisis, in Europe - have left marks that have not healed. But it can equally be argued that those marks cannot heal - that, in fact, Europe's economy has appeared to be much larger than they were prior to 2008 because of financial legerdemain that has now been comprehensively exposed. Either way, the euro zone's economy is clearly recovering, if the ECB is to be believed.

Last week, the ECB released its latest growth projections for the region's economy. It said that euro zone would expand 1.5 per cent in 2015 - a growth rate that would go up to around two per cent in each of the next two years. This is an upward revision, as compared with the last estimates the ECB issued at the end of last year. What, precisely, could have caused this optimism? Well, of course, the ECB's quantitative easing, or QE, programme is one. Indeed Mr Draghi was boasting of the programme's success even before it began. In these days of hyper-reactive markets, the announcement of the QE programme was sufficient to see some of its effects begin to take hold, as markets responded to new expectations. It had already become easier for households and firms to borrow, Mr Draghi insisted on Thursday. Long-term and corporate rates had come down, and that could fire up entrepreneurship, investment and growth.

Besides QE, there are other structural factors working in Europe's favour. One is the increasing strength of the US dollar. Robust job figures in the United States - 295,000 new non-farm jobs were created in February, as opposed to an expected 240,000 - might cause the Federal Reserve to raise rates quicker than expected. That would further constrict the supply of dollars - after it has already risen to an 11-year high against the euro. The euro is now at $1.09 to the dollar, whereas it was $1.39 as late as last May. This should add strength to Europe's external competitiveness. Then, of course, there is the question of oil prices. Whatever the sustainability of the oil market's current lows, it is at least clear that fuel-importing European economies will get a boost to their numbers. In other words, the QE boost will receive favourable tailwinds. Seen from this angle, Mr Draghi's jaunty optimism seems quite justified.