The European Central Bank acted to soften a looming recession and avert a credit crunch in the debt-plagued euro zone by cutting interest rates on Thursday as European Union leaders prepared for a crucial summit.
The ECB cut its main rate by a quarter-point to a record low 1.0 percent as anxiety over the worsening sovereign debt crisis drowned out concern about above-target inflation.
ECB President Mario Draghi was expected to announce further action to support teetering banks with longer term credit at a news conference at 1330 GMT. He has signaled the central bank may act more decisively if an EU summit on Friday agrees to move towards fiscal union in the euro area.
European Commission Jose Manuel Barroso appealed to European leaders holding their eighth crisis summit of the year to put aside sharp differences to support their common currency.
“The summit that we are going to tonight in Brussels is indeed a crucial one,» Barroso said at a meeting of European conservative party leaders in the French port city of Marseille, using words reminiscent of late U.S. President John F. Kennedy.
“What I expect from all heads of governments is that they don’t come saying what they cannot do but what they will do for Europe. All the world is watching us and what the world expects from us is not more national problems but European solutions.”
France and Germany planned to use the Marseille meeting to lobby for their plan to amend the European Union treaty to toughen budget discipline, which they want to have ready by March. But several countries are skeptical.
The often contradictory views were illustrated by two comments that came within a few hours of one another. France’s Europe minister said the fate of the euro was at stake.
“What that means … is that the euro can explode and Europe come apart. That would be a catastrophe not only for Europe and France but for the world,» Jean Leonetti told Canal+ television.
The chairman of euro area finance ministers said the 17-nation currency was not at risk.
The euro gained on currency markets after the ECB decision but European shares pared gains in thin trading with investors sidelined by uncertainty over the summit outcome.
A Reuters poll of economists found that while 33 out of 57 believe the euro zone will probably survive in its current form, 38 of those questioned expect this week’s summit will fail to deliver a decisive solution to the debt crisis.
U.S. Treasury Secretary Timothy Geithner, winding up a visit to Europe to urge decisive action, praised Italy’s new austerity budget and reform plans and said the world could be encouraged by the euro zone’s progress in the last few weeks.
It was essential for European leaders to strengthen their financial firewall to give economic reforms a chance to work, he said after talks with new Italian Prime Minister Mario Monti in Milan.
Ratings agency Standard