Macroscope | Expect this grim reality as the ECB pulls the plug on cheap credit

European equities have been one of the foremost financial tips this year and investors have not been disappointed. A rebounding economy, the more settled political picture, greater financial stability and a resurgent euro have been the hallmarks of success for European stocks in 2017. The key question now is future sustainability as European policymakers test the waters for tougher times ahead.

All good things eventually come to an end and the key worry for investors, now the European Central Bank is flagging an end to years of super-stimulus, is whether the fledging European recovery thrives under its own steam or withers and dies. Zero interest rates coupled with the ECB’s quantitative easing programme have clearly revitalised European consumer sentiment, business confidence, jobs and growth, but has it really paved the way for self-sustaining, economic renaissance for years to come?

The odds are probably not. Whatever the optimists may say, the euro zone is still a zombie economy. Artificially reflated by extraordinary policy measures, there are still too many “ghosts in the machine” for Europe to come out of years of grinding austerity, deep debt deflation, crushing balance sheet restructuring and dire financial crisis, unscathed and ready to enter into a bright new economic future.

As things stand right now, most signs are looking more upbeat than they have done for years. After two punishing recessions in 2008-2009 and 2011-2013, euro zone economic growth has slowly but surely ground its way up to 2.3 per cent in the last quarter with stronger consumer demand and export growth providing most of the leading edge for the recovery.

The euro zone jobless rate has fallen sharply to 9 per cent, with youth unemployment in the weaker economies showing signs of improvement too. Political risks seem to have abated after a bevy of key elections in the last few years have passed without any major upset. Meanwhile financial uncertainties have eased off quite sharply from the height of the European crisis in 2011-2013.