ECB takes (a little) action


"It's like opening the windows in a convertible when the top's already down". That is how one market commentator has described the European Central Bank's (ECB) widely anticipated rate cut: Welcome, maybe, but unlikely to bring a big change in the weather for the periphery economies currently locked in the boot.

The euro rose in value, around the time the rate decision was announced, only to fall through the floor later on during the ECB President's press conference, falling 0.7% against the dollar in not very much time at all.

Does that market reaction make any sense? Not really. Long-term, as I've argued in the past, it's hard for most economists to see the eurozone's 17 economies coming through this without a weak currency.

Rebuilding their competitiveness within the eurozone is hard enough for the periphery countries, without the added disadvantage, in world markets of a strong exchange rate.

That is one reason why you might be puzzled that the euro has usually gone down at the worst moments of the crisis - and risen in value when policy makers seem to be pulling together.

But that is a long-term issue.

Further action?

Today's fall in the value of the euro is surprising for a different reason - because it suggests that financial markets think the ECB is preparing to take more dramatic steps to support the eurozone economy.

That is quite possible. But I did not hear much in Mario Draghi's press conference to suggest it is now a lot more likely than it was before.

He said the ECB was "technically ready" to take the interest rate on its deposit facility into negative territory - in other words, to charge banks to park their cash with the central bank.

Interesting, but he's said it before.

He also said the ECB had "decided to start consultations with other European institutions" on measures to promote non-bank lending to companies by trying to revive that side of the asset-backed securities market.

On guard

Many had been hoping the ECB would move in this direction. But it's been talked about for months.

And Draghi later stressed that the consultations had not got very far.

In general, he seemed to want to talk down expectations of more unconventional measures from the ECB, not ramp them up.

It's possible the euro fell, not because of any of these comments, but as a result of the ECB President's general insistence that the ECB remained "ready to act" if further bad economic news suggested it was warranted.

So, investors might think, this might be the first of several cuts in the various interest rates that the ECB controls.

In the wings

Maybe. But standing "ready to act" has been the ECB's watchword for a long time now. It was "ready to act" with the Outright Monetary Transactions for the crisis economies last summer - with miraculous consequences for European financial markets.

It's been a while since it did a lot of acting.

The refinancing rate that the ECB cut today has been at 0.75% since last July: Higher than the Federal Reserve's main policy rate, and the Bank of Japan's, and the Bank of England's. It was 1% until December 2011.

The European Central Bank has cut its key interest rate by one half of one percentage point, in 17 months. In those 17 months, inflation in the eurozone has fallen from 2.7% to 1.2%, and the eurozone economy, overall, has shrunk by around 0.75% - with much steeper falls in the crisis economies and at least another year of recession predicted for many countries.

Puzzle all you like about what the ECB might be about to do next. We shouldn't forget to be surprised that it has taken so long to do even this.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 96.


    You don't know what the FTT is, do you?


    Are you confused? Look up the figures and I think you'll find the nations with the most welfare were the longer lived.

  • rate this

    Comment number 95.

    response to 92 cont
    fractional reserve banking predates capitalism
    how can firms sell without customers buying?
    in aggregate terms spending= income
    the Great Depression of the 30's predates welfare
    thanks to growing inequality we are back to the future
    stuck in 30's style entrenched weak demand
    sustainable growth and full employment only returned
    after the massive fiscal stimulus of WW2

  • rate this

    Comment number 94.

    18. ComradeOgilvy

    Charging banks for providing a service isn't that radical.

    Charging executives for criminal behaviour. That would be radical



    1. Charge the half-wits who rail-roaded the euro into existence without even doing schoolboy economics first!

    2. Charge the half-wits who were running the ECB & ignoring wild spending by weak economies who couldn't afford it!

  • rate this

    Comment number 93.

    so why does printing money in Zimbabwe lead to inflation
    but lead to deflation in Japan?
    answer hyper inflation is a supply side shock
    if an agrarian economy cuts its output by 50%
    as Zimbabwe did during land seizures new demand raises
    prices not production

    reagonomics leads to monopoly corporatism -the big win
    as wage rises fall behind GDP and productivity gains -
    welfare rises

  • rate this

    Comment number 92.

    91.G Paul Turner
    "Only aggressive efforts to put money in the hands of consumers will get us out of this crisis of capitalism"
    They did that in Zimbabwe... printing money doesn't work unfortunately. It makes things worse.

    Don't blame Capitalism, we don't have Capitalism.
    We have Corporatism and Welfarism, built upon fractional reserve banking.

  • rate this

    Comment number 91.

    Only aggressive efforts to put money in the hands of consumers will get us out of this crisis of capitalism, which went to such lengths that the banks did not even know what they (and each other) had accumulated - or not. We are in a post-capitalist (and post-Thatcherite) era and the sooner that the State's institutions support the individual consumer directly, not "via" the banks, the better.

  • Comment number 90.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 89.

    The Euro and the Eurozone is DOOMED! When will they realise that?!

  • rate this

    Comment number 88.

    The search for yield is driving stocks and shares. In a sane world that is very good. This is not a sane or rational world and neither are its markets.

    An area of stock markets never really considered from afar, is the daily volume of churn. It is an ongoing phenomenon that is unexplained.

    As prices climb, p/e declines forcing business to invest.
    I have a theory, interest rates cause inflation.

  • Comment number 87.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 86.

    If austerity works, what will it deliver?

    If it doesn't, how do you turn it around in the middle of a banking crisis. Yes, the EU has the same banking crisis as the US and the UK.

    Jolly good fun this all is. Keep a large box of Kleenex near by.

  • rate this

    Comment number 85.

    Only faith I have in economists is for a certain student. Found problem following procedure of the 2 austerity gurus with regard to their seminal deceleration. Professors said no he must be wrong, these are after all, highly respected economists. His girlfriend checks out the spreadsheet used for calculations, BINGO they've used wrong formulae in a certain cell. It's junk just like pseudo science

  • rate this

    Comment number 84.

    Greece seems, according to various figures, to have bottomed and what do we know agout Greek figures? They are... veluptuous and got them into this mess, with a little help and some off balance sheet derivatives.

    All they required was a long term loan but the Central Bank, isn't. I would like to know how many Porches were sold in Greece last year :)

  • Comment number 83.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 82.

    80 are of by upto 2%. The US have thrown the monetary kitchen sink at the problem and cannot generate growth sufficient to generste employment growth they require.

    The entire problem is complicatedly simple. Private wealth will not invest into low interest rates. Dumb as ducks. If you do not grow you do the opposite and decline. In EU the FC is LAW and member states economic plan.

  • rate this

    Comment number 81.

    It's taken so long, when will they admit, they haven't a clue. We've tried this & we've tried that, nothing works including our eyesight. Remember " see green shoots ", last month - last quarter - last year. If their job is to manage / repair economies, they've failed miserably time after time ad infinitum. Anyone else failing in work competence would be out the door rapid.

  • rate this

    Comment number 80.

    Lower EU growth is, l feel, expected in consequence of crashing through the Fiscal Compact's Austerity. Germany is a large economy and did austerity with Hartz 4 to bounce back into a global boom. To German austerians it works.

    Time will tell if it works in the global and EU economy now. The Rogoff Reinhart equations are off by

  • rate this

    Comment number 79.

    If Japan setting 0.00 and even negative interest rates has seen their stock market crash 75% and economy stagnate for the last 20 years... why do we here in Europe think it will work with our economies? Even Germany's economy, the engine of Europe, grew at a far lower rate than was forecasted (prayed for).

    74.John in Kent
    You know... You sound an awful lot like comrades Lenin and Marx.

  • rate this

    Comment number 78.

    @76 cilurnum
    'How can anyone get any return on investment when interest rates have to be so low...?'
    * * * * *
    Invest in ways that aren't determined by set rates, for instance the stock market. This is far riskier, but if you want the possibility of higher rewards you have to manage that. Timing is everything and thinking medium to long term helps to reduce that risk.

  • rate this

    Comment number 77.

    What, I said there is no link between the welfare state and life expectancy. What part of that did you miss @46? In fact, countries with less of a welfare state and more freedom live longer and healthier than those countries with more of a welfare state.

    Modern examples incl:
    USSR vs. USA.
    North Korea vs. South Korea.
    Maoist China vs. Hong Kong.
    East Germany vs. West Germany.


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