Eurobankers change direction by stealth

The refusal of European central bankers last Thursday to reduce interest rates in the eurozone has been widely interpreted, especially by politicians, as a «dogmatic response» to an ever-worsening economic environment. The critics go on to point out that a rate cut during a full-blown crisis would be useless. Even brokers, usually supportive of bankers’ tough measures, are hardly able to hide the impatience with which they expect banks to provide a lifeline to enterprises under severe duress. There is indeed strong pressure for monetary authorities to play a greater part in trying to salvage eurozone members’ hopes for economic growth. Naturally, members of the European Central Bank’s governing board have been feeling this pressure keenly. The tough stance chosen by European Central Bank chief Wim Duisenberg in answering questions by European Parliament deputies was a message to the bank’s swelling ranks of critics. But he must have caused some embarrassment to his colleagues. A favorite exercise of economic analysts is to decipher the answers given by central bankers. Let us do the same. Last Thursday, Duisenberg remarked that «the dangers to price stability are, for the time being, balanced. Speaking about the same issue on September 12, he had phrased it differently; speaking about those inflationary dangers, he said they «appear rather balanced.» Leaving out the word «rather» shows the evolution of his analysis: It is probable that, during the ECB’s next meeting, inflationary pressures will not be considered too strong to prevent a decline in the euro’s main rate. This conclusion is strengthened if we go back a little, to the June 7 meeting. Then, concerns over inflation were even more prominent. «The medium- to long-term picture concerning price stability remains less satisfactory than we had expected a few months back,» the bank had announced. It is obvious that the bank’s thinking over rates went in the opposite direction. Going further back, to May 2, the ECB said that prospects «are less favorable than at the end of last year.» The paradox is that the eurozone’s Harmonized Index of Consumer Prices had fallen from 2.7 percent in January to 1.8 percent in June, but has been climbing back, to 2.1 percent in August and an expected 2.2 percent in September. Nonetheless, it is the first time that eurozone bankers appear to be unconcerned about this development and limit themselves to reasonable reservations about the impact of possible military operations in Iraq on fuel prices. This is another confirmation of the «silent revision» of the dogmatic position the ECB has taken since its inception, about the primacy of «price stability,» that is, inflation below 2 percent. The successful introduction of euro notes and coins, the stabilization of euro’s exchange rate with the dollar at an acceptable level, even the problems faced by Alan Greenspan at the Fed, have enhanced Frankfurt’s confidence. ECB remarks on developments in the real economy move toward the same direction, toward a more supple monetary policy. Their economic forecasts are far from those made last April 4, when they believed that «economic activity bottomed out at the end of last year.» Last Thursday, Duisenberg declared that «our previous expectations for an accelerated growth during 2002 will not be borne out.» Even last month, ECB estimates were more optimistic: «We expect a modest rise in real gross domestic product in the second half of the year,» an estimate similar to ones made in May and June. It is obvious that the eurobankers’ expectations about the economy run opposite to their estimates on inflation. This is a positive and, above all realistic, about-face. If it results in a successful rate cut – that is, a cut made at just the right moment to urge businessmen to invest and consumers to increase consumption – then the chances of avoiding a European recession will be very strong.