Euro zone

Single supervisory mechanism and economic growth

The EU zone reached agreement last Thursday of single supervisory mechanism for the banking system. In my view, the agreement marked the end of financial crisis in the zone. In the past year, ECB has taken several bold actions to deal sovereign debt and bank crisis, these actions are

  • $1.32 T in three year loans to banks
  • three times of interest cuts
  • expansion of eligible collateral for cheap Loans from ECB
  • creation of an open ended bond purchase facility

EU in next step has to tackle economic recession. Economy in the zone has suffered a reduction of 0.5% this year and is expected to shrink 0.3% as predicted by ECB.

My sense is that the ECB estimate of GDP growth might have biased to optimal side. If we refer the U. S. economic recession following its financial crisis, the recession in EU zone can be more severe than that estimated by ECB. It takes one to two years to transmit the effect of financial crisis into real economy. I think some impact from the financial crisis is yet to be seen in the EU economy. On top of that, austerity in several countries in the zone will further put downward pressure on their economies.