ECB unlikely to do more for stagnant eurozone
The European Central Bank is not expected to offer further help to the 17-countries that use the euro when it holds its monthly rate-setting meeting on Thursday – even though their economy desperately needs a lift.
Analysts say the bank will leave its key interest rate unchanged at a record low 0.75 percent, and stick to its position that it has done all that it needs to – and now it’s up to governments to get things moving by fixing their shaky finances and cutting the bureaucracy and regulations that block stronger growth.
The eurozone definitely could use a push. The economy shrank 0.3 percent in the second quarter, and the European Union’s executive commission predicts it will shrink 0.4 percent this year, and, perhaps more alarmingly, barely grow at 0.1 percent next year. That means downturns and high unemployment into 2014 at least.
Five eurozone countries are in recession – Italy, Spain Portugal, Greece and Cyprus.
The central bank has already used its chief stimulus tool – lowering interest rates – about as much as it can. The benchmark refinancing rate is at a record low, and money market rates are in some cases near zero. The refinancing rate is charged on loans from the ECB to private-sector banks, and through them influences a whole host of other short-term rates throughout the economy.
The bank has also made 1 trillion euros ($1.27 trillion) in low-interest loans for up to three years to banks, reducing the threat of bank failures that would further shake up the fragile economy.
Crucially, in September the ECB said it was willing to buy bonds issued by indebted countries, if those countries agree to lower their deficits. Such purchases would lower their borrowing costs, and the mere proposal has sent bond market borrowing costs plummeting.
All that helped ward off complete collapse, but now analysts and ECB officials themselves, including bank President Mario Draghi, have questioned how much a further cut in the refinancing rate would help.
In theory, a cut stimulates the economy by making it easier for consumers and businesses to borrow, spend and invest. Yet cheap rates and cheap loans to banks are not getting through to the wider economy in the form of loans. That’s because businesses see no reason to borrow and expand production in a slack economy.
The ?fear and loathing? reflecting worries the eurozone might break up have eased, said Richard Barwell, senior European economist at the Royal Bank of Scotland. Draghi can now express ?prudent optimism? about the future, he said, and basically ?the message will remain the same: it’s now down to the politicians, the ECB has done all it can.?
The ECB has argued that it’s up to countries to push ahead with so-called structural reforms – ones that make their economy more productive in the long term. Those typically include breaking down job protections for established workers so that companies can hire and fire more easily, and be more willing to higher younger workers. Spain and Greece have jobless rates of 54.2 percent and 55.6 percent respectively for people under 25. [AP]
