ECB president warns on economic growth
- Article by: DAVID McHUGH
- Associated Press
- November 8, 2012 - 10:50 AM
FRANKFURT, Germany - European Central Bank President Mario Draghi has warned that the economy of the 17 countries that use the euro remains weak and will struggle to grow even with "visibly improved" confidence among the currency union's financial markets.
After the ECB's governing council left its key interest rate unchanged at the record low of 0.75 percent, Draghi insisted the bank has done its part to haul the eurozone out of its financial crisis. Markets have rallied since the ECB offered in September to buy the bonds of countries such as Spain and Italy, which are struggling with borrowing costs on their debt.
Draghi said it was up to governments to improve investor confidence in the currency bloc by fixing their shaky public finances and cutting the bureaucracy and regulations that block stronger growth.
"Economic activity in the euro area is expected to remain weak, although it continues to be supported by our monetary policy stance and financial market confidence has visibly improved on the back of our decisions," he said at a news conference in Frankfurt.
The slack economy poses a serious risk for the eurozone because only a broad rebound will help shrink the levels of government debt that have already pushed Greece, Portugal, Ireland and Cyprus into asking for bailouts. Government debt across the eurozone now averages 90 percent of annual economic output — well above the 60 percent limit under the region's fiscal rules.
Draghi said current evidence "does not signal improvements toward the end of the year" and that growth was suffering from "heightened risk aversion," as consumers and companies seek to cut their debt and improve their finances.
As part of its efforts to calm the financial crisis, the ECB in September said it was willing to buy bonds issued by heavily indebted countries with the aim of lowering their borrowing costs as long as they are willing to ask for the help and take steps to cut their deficits. Since then, stocks have risen and borrowing costs fallen — without the ECB spending a cent to intervene. The proposal alone appears to have helped instill greater confidence in the countries' ability to pay down their debts.
On Thursday, the interest rate for Spain's benchmark 10-year bond on the secondary market — an indicator of investor wariness of a country's economy — was at 5.8 percent, up marginally on recent days but still way down from the unsustainable highs of 7 percent it reached in July. Meanwhile the Stoxx 50 index of leading European shares was up 148 points to 2,527.
While markets are feeling better, the outlook for the wider economy remains glum.
Budget cuts and tax increases imposed as part of austerity programs are weighing heavily on economies. The region's gross domestic product shrank 0.3 percent in the second quarter. The European Union's executive commission predicts it will shrink 0.4 percent this year, and, perhaps more alarmingly, grow only 0.1 percent all of next year. Unemployment is at 11.6 percent, highest the euro was introduced in 1999.
Five eurozone countries are in recession — Italy, Spain Portugal, Greece and Cyprus.
In theory, a cut to interest rates would stimulate the economy by making it easier for consumers and businesses to borrow, spend and invest. Yet low ECB rates and cheap ECB credit to banks are not getting through to the wider economy in the form of more loans. That's often because businesses see no reason to borrow and expand production in a slack economy.
Draghi indicated the bond purchase plan, by lowering borrowing rates in troubled countries and easing markets, was actually doing what an interest rate cut would normally do, calling it "equivalent to a further expansion of monetary policy."
Analyst Christian Schulz said that the bond-purchase program "has a stronger easing effect than any rate cut" and that Draghi's insistence that the ECB is ready to use the program outweighs anything else the bank could do right now.
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.
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