The Bank of Spain estimated the country’s GDP fell by 0.4 per cent in the first quarter, while purchasing managers’ surveys showed that economic activity across the region fell to a five-month low in April, killing hopes that the recession would be short and shallow. Meanwhile, the fall of the Dutch government after a row about Budget cuts and Nicolas Sarkozy’s poor showing in the first round of the French presidential election “highlight popular unease at austerity attempts”, according to Investec's Ewen Stewart.
To compound the problems, the ECB’s attempts to encourage banks to increase lending and their holdings of southern European government bonds through its long-term refinancing operations (LTRO) seem to have failed. A survey by the ECB this week found that banks have tightened the availability of credit to companies in the last three months, and that corporate demand for loans has fallen. Also, yields on 10-year Spanish government bonds hit 5.9 per cent this week, a full percentage point higher than they were in early March.
“The LTRO party is over. Bond markets are in panic mode” says Marchel Alexandrovich at Jefferies International. “The ECB will have to do something else.” That something, he thinks, could be full-blown quantitative easing.
The possibility of such radical action offers hope for shares. Mr Stewart says investors should regard any dips as buying opportunities. He says that while voters are opposed to austerity, they have not yet made the “philosophical leap” to seeing that “euro exit may be their only long-term solution to austerity, unemployment, depopulation and no growth.” It is if, or when, this leap is made that the euro crisis will enter its final phase.
