While plenty of uncertainty remains, 2013 may prove to be a turning point for the European economy, according to Julia Coronado, chief economist, BNP Paribas, speaking as part of the Economic Outlook 2013 panel discussion hosted by the Economic Club of Canada on Friday.
“We’re cautiously optimistic [about Europe],” said Coronado at the Toronto event. “I think the biggest tail risks have been eliminated but the macro-economic fundamentals matter – so, be cautious.”
Some of those “tail risks” have been eliminated by the European Central Bank’s (ECB) commitment to bolster the Euro through liquidity programs such as the long-term financial operation (LTRO) and outright monetary transactions (OMTs). The LTRO is meant to provide support to bank lending and liquidity in the euro money market, according to the ECB, while OMTs are a replacement of the securities market program (SMP), which was a strategy of buying public and private debt securities to stabilize bond prices in the medium term.
“Effectively, we have a structure in place to forestall any kind of sovereign funding collapse,” she said, “and that’s had an extraordinary impact on markets and financial conditions broadly.”
However, there are still many risks facing Europe’s economy. First of all, while Europe should see some economic growth in 2013, albeit very slow growth, said Coronado, many European countries are currently dealing with deep recessions.
Secondly, Spain could soon be downgraded by rating agencies depending on its upcoming budget announcement in February, she said, which would send ripple effects through equity and bond markets. Also, Italy will face some economic uncertainly as it heads into an election in February.
As well, in order for Europe to reach even a small level of growth, it’s important for the ECB to stick to its commitments. “[The ECB] tends to get a little too optimistic, a little too quickly,” said Coronado. “They need to stay the course and certainly communicate a resolve to be there and to be supportive of the economy.”
A final concern for the European economy is its own citizens, according to Craig Alexander, chief economist, TD Bank Financial Group, who also spoke as part of the panel.
“The high unemployment rates really [creates] a risk of social push back against the austerity and the weakness in their economies,” said Alexander. “If we see something turn really bad, really quickly in Europe, it would be that we had a public backlash against the austerity programs that are currently in place.”