2014 - Yet Another Tumultuous Year For Eurozone

(RTTNews) - As another chaotic year comes to a close, Eurozone stares at dual specters of economic stagnation and deflation that is likely to push the European Central Bank into more action, risking the ire of powerful Germany.

Coming weeks are likely to see the central bank embark on full-blown quantitative easing to regain the momentum in the euro area economy and kindle inflation.

Growth ======

The 18-nation economy managed modest growth throughout the year - logging growth of 0.2 percent, 0.1 percent and 0.3 percent in the first, second and third quarters, respectively. Among the big four, Germany and France dodged recession during the year, while Italy slipped back into recession in the third quarter. Spain managed moderate growth with the momentum broadly unchanged.

Flash data for the fourth quarter gross domestic product is due on February 13, 2015.

In November, the European Commission slashed the Eurozone growth forecast for this year to 0.8 percent from 1.2 percent. Economic activity, however, should gradually strengthen over the course of 2015 and accelerate further in 2016, as the legacies of the crisis fade away, structural reforms start to bear fruits, and labor markets improve, the Brussels-based commission said.

The European Commission has trimmed the euro area growth outlook for next year to 1.1 percent from 1.7 percent predicted in May. The commission predicted 1.7 percent growth for 2016.

Unemployment ============

Joblessness remains high though it has eased from 11.8 percent seen at the start of the year to 11.5 percent in October. Unemployment set new records in France and Italy, while the German jobless rate fell to its lowest level in more than two decades in November. Spanish unemployment rate eased to its lowest level in nearly three years in the third quarter and claims fell for a second straight month in November.

The European Commission has predicted 11.6 percent jobless rate for this year and 11.3 percent next year. The unemployment rate is seen falling to 10.8 percent in 2016, which is still above pre-crisis levels.

Inflation =========

According to the latest data from Eurostat, euro area inflation eased to a five-year low of 0.3 percent in November. Core inflation was 0.7 percent. The ECB aims to keep headline inflation 'below, but close to 2 percent'. The recent fall in oil prices has weakened the inflation outlook.

Results of the latest Survey of Professional Forecasters for the fourth quarter, published by the ECB in November, showed that the Eurozone inflation outlook for next year was slashed to 1 percent from 1.2 percent seen earlier. The projection for this year was lowered to 0.5 percent from 0.7 percent and the outlook for 2016 was cut to 1.4 percent from 1.5 percent.

Monetary Policy ===============

Interest Rates

Despite two interest rate cuts and a slew of stimulus measures, the year saw the ECB, under the leadership of Mario Draghi, fighting hard to avert deflation in the euro area and return the economy to solid growth.

After holding rates steady in the first five months of the year, Draghi cut interest rates in June. He even dared to explore the uncharted territory of negative rates by slashing the deposit rate that was already at zero to -0.10 percent. That in effect meant Eurozone banks would be charged for parking excess funds at the ECB, a first for a leading central bank.

The June easing proved inadequate to prevent further slide in inflation and Draghi was forced to lower rates in September. In a surprise move, the three main rates were lowered by 10 basis points.

As of December 31, the main refinancing rate is at a record low 0.05 percent, the deposit facility rate at -0.20 percent and the marginal lending rate is at 0.30 percent.

Stimulus

In monetary stimulus, the ECB introduced a new longer term loan programme for banks this year. In June, the central bank announced two targeted longer term refinancing operations, or TLTRO. The first was held in September and the second in December. The total funds on offer under eight TLTRO operations are EUR 400 billion.

The loan-take up by banks in both TLTRO operations, totaling EUR 212 billion, was less-than-expected, forcing economists to cast doubt on the ECB's goal of boosting its balance sheet by EUR 1 trillion. They also expect the central bank to opt for a full blown quantitative easing, including sovereign bond buys, early next year.

The proposals for boosting the ECB balance sheet to EUR 1 trillion and buying sovereign bonds face stiff opposition from different quarters, especially from the most influential state - Germany. While there has been some speculation of the bank discussing the purchase of corporate bonds.

The bank already started buying covered bonds and asset-backed securities, measures which were announced in September.

Policymakers have repeatedly said that the bank stands ready to take further measures if the Eurozone economic situation warrants action.

Other ECB News

In other ECB news, the bank decided to publish the minutes of its monetary policy meeting, starting next month, although it opted not to reveal the votes of individual members of the rate-setting body. The bank also altered the schedule for the Governing Council's rate-setting sessions from the currently tradition of holding monthly meetings.

The ECB will publish regular accounts of Governing Council monetary policy discussions, starting with the meeting on January 22, 2015. The accounts will be released four weeks after each meeting.

Further, the bank also announced that it will replace its monthly bulletin with a new one to be published two weeks after each meeting.

The ECB began operating from its new premises in Grossmarkthalle - Frankfurt's former wholesale market hall - in November and the December rate-setting session was held there.

Banking Reform ==============

Eurozone banking sphere witnessed landmark reforms during the year. In November, the ECB took over as the Single Supervisor for the euro area banks. The central bank will directly supervise the largest banks, while the national supervisors will continue to monitor the remaining banks.

Late October, the ECB released the results of the stress tests carried out for the 130 largest banks in the euro area as on December 2013. The exercise was a step in the run up to the ECB taking charge as the watchdog. The comprehensive assessment found a capital shortfall of 25 billion euros at 25 banks. The assessment consisted of the asset quality review or AQR and a forward-looking stress test of the banks.

Bailout Exits =============

The year saw two more Euro area states exiting bailout programs they adopted during their crisis years, while the status for Greece, which expected to emerge from bailout this year, is yet to be decided given the political uncertainty in the country. After Ireland exited the EU/IMF bailout scheme in December 2013, Spain followed on January 23 by exiting the EUR 100-billion bailout it secured in 2012 during its banking crisis. Spanish banks tapped only EUR 41 billion from the rescue fund. On May 16, Portugal exited the EUR 78-billion bailout for its economy, secured in 2011.

Eurozone Expansion ==================

Latvia joined the euro club at the start of this year, taking the number of members following the currency to 18. On January 1, 2015, Lithuania is set to become the newest member to adopt the euro.