European Central Bank is progressing on expanding economic growth, credit

An image of Euro banknotes being counted.
Leonhard Foeger | Reuters
An image of Euro banknotes being counted.

The euro area monetary policy is working against strong headwinds of high (and in some cases rising) unemployment, increasing security threats, absence of a unifying leadership and the public's souring mood about the viability of the European economic and monetary union (a.k.a., the "European project").

All these are direct sequels of devastating austerity policies. And to make things worse, those who imposed these policies are now brutally attacking the ECB for low (nominal) interest rates on saving deposits and insurance policies as the bank struggles to keep the euro area economy afloat.

True to form, these ECB critics had no second thoughts about what they were doing to their fellow Europeans waiting, homeless, cold and hungry on long soup kitchen lines and in makeshift charity shelters. And neither would they spare a thought for those currently living on subsistence wages (e.g., Spanish "mileuristas"), and for more than half of desperate jobless youths in several euro area countries. Some of these poor and alienated young people have become radicalized killers.

But the selfish cynics criticizing the ECB are undeterred. They continue to brainwash people that the ECB's supportive credit policies are ineffective, and that they should be stopped immediately to let interest rates increase on saving deposits and insurance premiums.

Growing consumer and business loans

Ineffective ECB policies? How does that square with the near doubling of the euro area growth last year to 1.6 percent? Could that be a windfall from fiscal austerity the ECB critics keep pushing?

The truth is that the clueless austerians (sorry for this ugly neologism) are hopping mad because the ECB succeeded in extracting a miraculous revival from a clinically dead euro area economy.

The latest data (February 2016) show that the ECB's broad monetary aggregate, M3, remains on a stable 5 percent growth path traced out since last summer. Its credit components are also advancing. The growth of credit extended to euro area residents accelerated in February to an annual rate of 3.2 percent from 2.6 percent in January.

The fastest-growing segment is lending to euro area governments. The fact that this aggregate marked an annual increase of 10.1 percent in February (after 8.7 percent in January) is driving the ECB's critics berserk. Especially since that is the centerpiece of the bank's strategy.

The idea here is that buying government bonds in exchange for cash will help the euro area banks rebuild their damaged capital base. As that process gets well on its way, the ECB expects that banks will be more willing and able to finance household spending and business investments.

Is that happening? Yes it is, and the pace of some key credit aggregates is quickening.

The growth of consumer loans shot up to 5.2 percent in February from an average growth of 3.9 percent in the previous two months. Mortgage lending was much more subdued, but it held up at an average 2.1 percent growth rate during the three months to February.

Unfortunately, lending to non-financial businesses is still weak. A small consolation is that it began showing positive growth only during the fourth quarter of last year. Viewed in that perspective, a 0.9 percent annual increase in February is a considerable progress.

Particularly encouraging is the February's 6.3 percent increase in corporate loans of up to five years of maturity. That could be signaling a sustained recovery of the euro area business investment from a 3 percent decline during the severe phase of austerity madness in 2012-2013.

Are these still ineffective ECB policies? Yes, but only if you believe that raising interest rates on savings deposits is more important – and morally acceptable -- than creating jobs and rescuing the 20-25 percent of fellow Europeans living below the poverty line in Greece, Spain, Portugal and Italy – countries representing nearly one-half of the euro area economy.

Shocking to even think of something like this? Not in the least, because this is a fraternal Europe of every man for himself. Except, of course, when it suits those who threaten to punish (by withholding the European regional development funds) the small Central European countries insisting on "zero immigration policies."

Stand up, France!

Some chutzpah, isn't it? But why not, some might say, if you can get away with it? They might also argue that there was nothing new about that. The Athenian historian and general, Thucydides, who lived from circa 460 to 400 BC, said that "the strong do what they can and the weak suffer what they must."

And that was the case last week as London tabloids screamed "Your vote means NOTHING …," echoing the German chancellor's comment that the resounding "no" vote of the Dutch referendum on EU's close links with Ukraine "will be managed." In other words, the Dutch democracy was invited to ignore the 61.1 percent (final results will be published Tuesday, April 12; the provisional turnout estimate is somewhere between 32 and 34 percent) of its people who voted against the proposed commitment that is being taken in their name and on their wallets.

The French president did even one better, saying that France would apply the Ukraine deal as is. The French government will ignore the wishes of the Dutch people who cared to cast their ballot on an eminently European issue. That was a great show of unity and respect for rules of democracy.

No wonder that 45 percent of the French youth (18-35 years) put last week the Europhobic Marine Le Pen, the leader of extreme-right Front National, well ahead of other declared and presumed presidential candidates the May 2017 elections. That confirmed a clear progression from a 35 percent approval rating Madame Le Pen got from young French voters in an opinion poll conducted last November.

OK, so who is to blame for (a) this deconstruction of the "European project" and (b) the open season in Europe's largest economy on ECB's policies?

No, no, my pick is not Germany. My overwhelming pick is France.

With generous help and financial support from Washington, France laid the foundations of European unity in the early 1950s, under the leadership of Robert Shuman (the former French foreign minister) and Jean Monnet (an influential French economist and diplomat) as the world was still reeling from the WWII slaughter of more than 60 million people at the hands of Nazi Germany and its allies.

The French leadership was so preeminent in the 1950s and 1960s that the late President General de Gaulle quipped "'The European Economic Community is a horse and carriage; Germany is the horse and France is the coachman." But that leadership was steadily eroded by his successors' economic and political mismanagement to the point where the general's young cabinet member and a former French President Jacques Chirac (almost) came to a fistfight with the German Chancellor Kohl at the EU summit in Dublin, Ireland in December 1996 to get the ECB's presidency for Jean-Claude Trichet.

After Chirac left the scene in May 2007, the general's carriage broke down and lost whatever was left of the proverbial coachman. Chirac's successor, Nicolas Sarkozy, was painted on a front page of a British magazine in a side car of a motorbike driven by the triumphant German Chancellor Merkel. But the ultimate putdown was a publicly aired German comedy sketch where Sarkozy was acting as a maître d'hôtel serving an opulent dinner to Mrs. Merkel.

And here is what Marine Le Pen had to say last October to her President François Hollande, who was sitting next to Chancellor Merkel during a special session of the European Parliament: "Thank you, Mrs. Merkel, for the pleasure of having brought with you your vice-chancellor, administrator of the French province. Mr. Vice-Chancellor, I would have liked to call you Mr. President for the respect of your function, but neither you nor your predecessor (i.e., Sarkozy) have exercised the presidency …"

Investment thoughts

Watch the ECB and don't get distracted by the "interesting times" as the French election campaign gets into overdrive in the months ahead.

The vote in the ECB's Governing Council shows an overwhelming support for its policies. That will continue even if -- as seems very likely -- Germany were to insert its relentless ECB attacks as a hugely divisive political item in the forthcoming French and German elections (May and September 2017, respectively).

Compared with the Dow, Nikkei and emerging markets, the euro area stocks (Euro Stoxx 50) are the worst performing (expressed in local currencies) over the last twelve months. Since the beginning of the year, that dubious distinction belongs to the Nikkei, followed by single-digit losses on the euro area stocks, while the Dow and the emerging markets managed to register small gains.

I expect the euro area stocks to continue to lose ground in the coming months, despite improving growth, employment and supportive ECB policies. The main culprits are the euro area's security threats, unbridgeable differences on immigration and other key issues, and widespread doubts about the viability of the "European project."

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This report has been updated to reflect that the French presidential elections are due May 2017.