Draghi vindicated as growth returns and crisis subsides

Mario Draghi’s view that the eurozone doesn’t need more monetary easing for now is being vindicated.

Manufacturing and services activity in the region is near the strongest level in almost three years, according to surveys of purchasing managers released yesterday.

The data round off a quarter of growth even against a backdrop of geopolitical upheaval in Ukraine and an economic slowdown in China, suggesting the ECB president’s policies have put an end to the eurozone crisis.

Draghi’s interest-rate cuts, liquidity injections, and a controversial pledge to buy the bonds of crisis-hit countries have boosted business confidence and prompted renewed fund flows into stressed economies. Even so, while he kept rates on hold this month, he warned that risks including subdued prices and a strengthening currency remain.

International investors are returning, including to nations that received bailouts in the depths of the crisis. US exchange-traded funds show net inflows of €524m into Spain this year, marking an increase of 59%, according to data compiled by Bloomberg.

The PMI reports bear out the confidence Draghi put in the fledgling recovery when policymakers decided against easing monetary policy this month. The ECB kept its benchmark rate at a record low of 0.25% for a fourth month, and Draghi said the economy was meeting the central bank’s baseline scenario of a gradual recovery.

Economists predict ECB policymakers will keep rates unchanged through at least the third quarter of next year. Draghi committed to keep borrowing costs low until after the economy has shown signs of improvement.

At the same time, he highlighted risks to the outlook, including unemployment near a record high and inflation at less than half the ECB’s goal of just under 2%

“A sustainable recovery is not yet firmly established,” said Martin van Vliet of ING Groep NV in Amsterdam.

“Indeed, the further weakening in the Chinese PMI and the relatively strong euro do not bode well for export growth momentum going forward.”