Recovery could be a headache for Draghi

The ECB is expected to clear the way for quantitative easing (QE) to commence after its council meeting on Thursday. Just as this happens, ironically, signs are growing of some pick-up in the euro zone economy. You could argue that this is, in part at least, due to the promise that QE is on the way, but in any case it is happening.

The clearest sign came in euro zone retail sales figures for February, which showed a 1.1 per cent monthly rise and a healthy 3.7 per cent annual increase, the largest yearly rise in almost 10 years. There had been fears that consumers would hold off spending due to fears of deflation – a period of falling prices. But for the moment this is not happening. In fact, consumers appear to be happily pocketing the benefit of lower fuel prices and using the cash to up spending elsewhere.

Other indicators have been reasonably positive, too, such as the monthly purchasing managers’ index, seen as an indicator of the manufacturing sector. The lower euro is also expected to boost exports out of the euro zone. For the moment, fears of a Greek exit from the euro have also eased. German growth, in particular, seems strong.

One of the interesting questions is what recovery, and a pick-up in the rate of inflation, might mean for QE, which is due to involve the purchase of some €1.1 trillion in assets, mostly government bonds, up to September 2016. As part of this, up to €13 billion in Irish government debt is due to be purchased. What will the ECB do if recovery takes hold? Presumably it will push ahead until well into next year, anyway.

This could be a headache for Draghi (above), but the upside is that he can claim some credit if recovery does take hold. In the US no-one was quite sure why QE worked, but in Europe – for politicians, and the ECB – the key thing is that it is seen to deliver the result.