It's very easy - but lazy - to be dismissive of Europe's economy. The euro area remains scarred by the global recession in 2008 and subsequent sovereign debt crises. Unemployment rates are depressingly high, public and private debt levels have soared, and political risks are simmering underneath the surface. But much to the chagrin of structural Eurozone bears, many of whom still can't quite believe the euro is still with us, the cyclical upturn has so far defied these bogeymen. Real GDP rose an annualised 1.8% in the first six months of the year—the best performance since the first quarter of 2011—and leading indicators point to further good news in coming quarters.
The cynics will point out that the recovery is entirely a result of a dovish coup at the ECB. Mr. Draghi’s July 2012 speech in London, where the president promised to do “whatever it takes to preserve the euro,” is arguably one of the most successful examples of central banking communication in European history.
The speech turned the tide of sentiment at a very dark time and, combined with the decision to push the deposit rate below zero and the launch of quantitative easing - money printing - earlier this year, it clearly suggests that aggressive monetary policy is a key reason for the economy’s turnaround. The ECB's trick was to switch investors’ focus from economic divergence between the core - Germany, principally - and periphery, to the relative attractiveness of bond yields in southern Europe, when the ECB is a buyer. This change in perception has driven a spectacular decline in peripheral bond yields since the chaos in 2012.
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