Bad news for eurozone puts Germany, ECB in the hot seat

By Simon Morgan, AFP

FRANKFURT–A raft of grim eurozone data this week alarmed financial markets and placed both Germany’s doctrine of budgetary rigor and European Central Bank’s monetary policy in the hot seat. A seemingly never-ending stream of gloomy numbers sent the stock markets into a tailspin and exposed the fault lines in economic thinking across the 18-country euro area.

ECB chief Mario Draghi insisted that growth depends on reforms by governments, but also sent a strong signal that the central bank could ramp up stimulus for the economy. “We are ready to alter the size and/or the composition of our unconventional interventions, and therefore of our balance sheet, as required,” he said in a speech in Washington.

Also, Germany’s leading think tanks called for a boost in spending to revive growth, providing grist for a campaign against EU budgetary rigor by French President Francois Holland. Waves of Gloom

On the sidelines of the World Bank and International Monetary Fund meetings in Washington, Draghi and German Finance Minister Wolfgang Schaeuble differed over how to pull the eurozone out of its economic quagmire.

The waves of gloomy data last week were relentless.

Germany, in particular, on which much of the European economy depends, was hit by unexpectedly sharp drops in factory orders and industrial output and a slump in exports. On top of this, the country’s leading economic institutes cut sharply their growth forecasts for both this year and next.

This and prevailing international tensions sent shivers through stock markets, with European stocks and the euro falling sharply. IMF chief Christine Lagarde, who has already referred to a risk of deflation in the eurozone, warned that there was a 35-40 percent chance of the region slipping back into recession.

The IMF cut its forecasts for euro-area growth to 0.8 percent for 2014 and 1.3 percent in 2015. And in Paris, the Organisation for Economic Cooperation and Development also pointed to a weak outlook for growth in the eurozone, and in Germany in particular. Austerity Mantra Until recently, Germany had managed to escape the worst of the eurozone crisis, thanks to difficult and painful reforms pushed through a few years ago.