On Sunday evening Portugal's Prime Minister Pedro Passos Coelho made a televised address, informing the Portuguese the country would exit its bailout programme later this month without the help of an EU-sponsored credit line. As with Ireland six months ago, the moment was historic, signalling a return to private market funding after three years of intense fiscal consolidation.
Almost immediately, Coelho was accused of political manoeuvring ahead of European elections, with critics highlighting the challenges remaining for the economy.
When it comes to elections, financial concerns matter. The euro zone crisis may have abated somewhat but the economic situation still tops voters’ concerns going into this month’s European elections. A poll by Eurobarometer, the EU body that measures opinion, carried out late last year, found economic matters were European citizens’ chief worry, with half of voters citing unemployment as their main concern, followed by the economic situation, rising prices and government debt.
Version of success
Portugal's imminent exit from the bailout is undoubtedly a success story for the euro zone. While the prospect of a clean exit seemed highly unlikely six months ago, surprisingly good gross domestic product figures boosted by a strong export performance strengthened Lisbon's case to go it alone. The country is also benefiting from a rally in euro zone peripheral bonds, in part reflecting a thirst from investors for high-yielding investments as they move away from emerging markets.
Whether this buy-in to euro zone bonds will be sustained is questionable. However, the broader picture is more fragile. This week a number of key financial publications contained warning signals about the European economy, most centring on deflation.
On Monday, the European Commission's Spring Economic Forecast downgraded its prediction for inflation to 0.8 per cent this year from the 1 per cent forecast three months earlier. The OECD was more explicit. In its twice-yearly economic forecast published on Tuesday it directly called on the European Central Bank to take action, highlighting continuing downside risks to the euro zone economy, including "high unemployment, below-target inflation and high levels of government debt".
“We call on the ECB to take new policy actions to move inflation more decisively towards target [close to or below 2 per cent] and to be ready for additional non-conventional stimulus if inflation were to show no clear sign of returning there,” its acting chief economist wrote.
All this increases pressure on the ECB to act when its governing council meets for its monthly rate-setting meeting today in Brussels. While the expectation is that Mario Draghi will refrain from cutting interest rates further or unveiling a quantitative easing programme, the ECB is coming under consistent pressure to provide extra stimulus.
What does this mean for ordinary voters? Low inflation is bad news for countries with high debt levels, as is the case in many countries in the euro zone. Falling wages increase the real cost of repaying loans. Low inflation also constrains economic growth, affecting job creation and discouraging consumers to spend as they anticipate further price falls.
The ECB has been criticised for prioritising the fight against inflation over the fight against unemployment, as it has refrained from engaging in non-conventional stimulus measures such as quantitative easing, a path taken by the US Federal Reserve.
Centralisation of power
For European voters, how the ECB and other institutions direct economic policy is important for their everyday lives. The so-called "two-pack" and "six-pack" economic governance rules adopted by the European Commission since the crisis marks one of the greatest cedings of national powers to Brussels since the launch of the single currency, as countries are obliged to submit national budgets to the European Commission for scrutiny. The ECB will have supervisory control of over 120 of the euro zone's biggest banks at the end of the year
Deeper integration of the European financial system has been one of the outcomes of the crisis. But while economic logic dictates that a shared currency needs a more integrated fiscal and financial system, the prospect of ever-closer integration is not something the majority of Europeans desire.
With Europe still facing unacceptably high unemployment rates and a prolonged period of low inflation, voters have the right to ask questions about the economic policy pursued by the European Commission, Council, Parliament and the ECB over the last five years.
The question of how European politicians intend to steer Europe out of the economic downturn should be the main question voters pose to European Parliament hopefuls on the doorsteps in the coming weeks.