News Column

ECB Could Be Running Out of Options

May 2, 2013

Andrew McCathie and Helen Maguire, dpa

The European Central Bank chief Mario Draghi might be starting to run out of options to boost the struggling eurozone economy after the ECB announced on Thursday a cut in interest rates and moved to boost bank lending for business.

Thursday's 25-basis-point reduction in borrowing costs to an historic low of 0.5 per cent was the fourth interest rate cut that the Frankfurt-based bank has delivered since Draghi took over as ECB president in November 2011.

But still, the eurozone has sunk deeper into economic gloom with the region's long-running debt crisis having also served to hit global economic growth.

The round of rate cuts announced by the ECB over the last 18 months have formed part of a series of bold decisions undertaken by the bank under Draghi's leadership.

This includes rolling out more than 1 trillion euros (1.30 trillion dollars) in cheap loans and launching a government-bond buying programme to reduce the borrowing costs of cash-strapped eurozone members.

But while the steps have helped to stabilize sentiment in the debt-hit eurozone, the economy has remained stuck in recession amid fears that it could be facing a protracted downturn.

At his regular monthly press conference on Thursday, Draghi opened the door to further rate cuts saying that the ECB stands "ready to act" if economic conditions in the eurozone continued to worsen.

The ECB backed up the rate cut announcement by launching new moves to free up bank lending for businesses in cash-strapped parts of the eurozone.

But while a rate cut should also help to boost liquidity for banks, some analysts believe the economic benefits of lower rates in the currency bloc are limited.

"The ECB's widely anticipated interest rate cut should provide troubled banks in the region's periphery with some much-needed support," said Jennifer McKeown, senior European economist with the research group Capital Economics.

"But it will not be enough to drag the euro-zone out of recession on its own," she said.

In the meantime, the ECB has found that the political ground in the currency bloc might be shifting away from the fiscal austerity and the drive to slash deficit-and-debt levels that it has helped to champion.

"Don't unravel the progress you have achieved," Draghi said conceding that some of the austerity measures had contributed to the slump underway across the eurozone.

But the risk for the ECB is that the bank could find itself isolated in Europe as it insists that eurozone governments should not abandon fiscal reforms.

On Wednesday, Italian Prime Minister Enrico Letta and French President Francois Hollande called for European leaders to pursue growth "with the same determination" they had shown in tackling budget deficits.

Echoing their remarks, Bernadette Segol, the secretary general of the European Trade Union Confederation, said on Thursday in Brussels there was an urgent need to address the sense of social injustice across the European Union.

"If the social question is not returned to the centre of European debates, at the centre of the vision of what Europe is, I think European workers will become utterly disenchanted and will no longer be able to support this project," Segol said.

However, Markus Beyrer, the head of employer federation BusinessEurope said however that it was not fair to say that the current push to fiscal consolidation had failed.

"I don't think that we have an alternative to what we are doing, to a balanced approach between fiscal consolidation and structural reforms," Beyrer said.

Many of Europe's current issues were due to policy mistakes made before the current crisis, he said.

The comments came ahead of a conference next week hosted by the European Commission, which is to consider its so-called blueprint for economic and monetary union.

This includes proposals for member states to enter into binding reform commitments and to coordinate large-scale reforms in advance.

The EU's executive is due to present EU leaders with detailed proposals at their June summit.

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Source: Copyright 2013 dpa Deutsche Presse-Agentur GmbH

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