EU Commission expects consumer spending to unlock growth

Last Friday 23 August the European Commission released its flash estimate for the consumer confidence index of this month, finding it markedly improved in relation to July. The full Business and Consumer Survey with final data on August developments is due to be published on 30 August 2013. In detail the Commission’s Directorate-General for Economic and Financial Affairs ‘DG ECFIN’ estimates that the August consumer confidence indicator largely improved in both the euro area (-15.6 after -17.4 in July 2013) and the EU (-12.8 after -14.8 in July 2013). On 14 August the European Sting writer Elias Lacon stressed that, “In short there is no doubt that the European Union in general and Eurozone in particular are about to abandon their long-term recession. There is also good news even from the labour market. According to a recent Eurostat press release the EU27 unemployment rate was 10.9% in June, down from 11.0% in May”. Lacon was optimistic after the European Commission and the Eurostat had released very positive statistics for economic sentiment and industrial production. A question of growth Despite that Lacon concluded: “Given that EU’s real economy is thought to have entered into a growth period albeit slow, euro area’s banking sector remains its weak point. Again the banks prove once more to be Eurozone’s dark spot, not being able to transmit to the real economy the abundant and almost zero cost liquidity offered to them by the European Central Bank”. It is evident by now that the central bank has changed its strategic policy lines in favour of the real economy. The basic changes in this new financial environment is that the ECB, in a rare exemption, has fully explained ex ante its main policy lines, guarantying abundant liquidity at interest rates even lower than the currently applied 0.5%. Unfortunately the ECB has no other means of transmitting its monetary policy to the real economy, than through the commercial banks. The ECB According to Mario Draghi, President of Eurozone’s central bank, the time span of these new measures will be extended “for as long as needed”. In this way the ECB tells the rest of the economic players in the public and the private sector, that the central bank will be generously supporting them in their efforts to enter into a solid growth path. The problem is that these highly accommodating monetary policy measures have to be passed to the real economy through the banking system. That is why Lacon concludes,“the banks prove once more to be Eurozone’s dark spot”. However the Eurozone and the EU economy in general seem to gain momentum even without the slightest support from the banking sector. Despite the fact that the lenders not only refuse to accord more loans but they keep cutting down the existing financial facilities, the real economy is slowly advancing towards the more dynamic and the upwards pointing part of the curve. Predictions help In support of this theory the European Commission insists that its prediction for a much better economic sentiment indicator in August, is correct. To this effect the EU’s executive arm notes that “To compute the flash consumer confidence indicator for the EU and euro area, DG ECFIN uses the data available on the cut-off date…Experience has shown this procedure to be statistically reliable”. As all first year students of economics know, predictions play a pivotal role in all markets and the economy as a whole. In view of this the Commission wants to reassure everybody that the Eurozone is going to enter into a much better economic landscape in the coming months. Not to forget that consumption constitutes by far the largest part of GDP. If the 500 million EU consumers feel that the economic sentiment is improving fast, by the same token, they seem to be ready to increase their spending. Not to forget that consumer spending is the locomotive of growth. The question is whether the Commission’s efforts and increased consumer spending in support of growth will be enough to outbalance the lack of financial backing to small and medium enterprises, a deplorable situation prevailing in the largest part of the Eurozone.