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 136.

    Your so-called paradoxes are simply two aspects of money - as a store of value and as a medium of exchange.

  • rate this

    Comment number 135.

    There are seismic events affecting our economy that will result in us becoming a third world state.None of this chatter about the action/inaction of the ECB will matter.

    We cannot compete with the Far East and the BRIC economies. They will rise we will fall.We cannot stop our slide into poverty.

    We cannot compete with their wages and working conditions.

    There is no solution for our economy

  • rate this

    Comment number 134.

    Communism failed because Communism doesn't work in a glogal context. China is trying highly regulated and controlled capitalism. Will it work when it needs to adapt to some external change? We will see.

  • rate this

    Comment number 133.


    Like I said, go check. In any case, you're arguing for the sake of it and it's getting tiresome. I'm happy to accept 129.fTP as the last word.

    JMK was wrong about what?

  • rate this

    Comment number 132.

    Scenario: a huge European Bank borrows £500Million to buy Italian bonds at the new 0.5%. What happens when rates go up to even 5%? KABOOM (default).

    Like the re-writing the rules on the side of the Great Barn in Orwells' Animal Farm, you're just a Communist apologist.

    Still waiting for those "facts" from you. Don't worry, I'm not holding my breath.
    P.s. JMK was wrong :)

  • rate this

    Comment number 131.


    "Are you for real?"

    Oh yes. And I form opinions based on facts. You can look them up if you wanted, like I did.

    "When the facts change, I change my mind. What do you do, sir?" - JMK

  • rate this

    Comment number 130.

    "The state was, by and large, not paying for welfare in either the USSR or Maoist China."
    Who provided the services and products to those societies, private people or the State?
    Come on... those 2 states had complete total welfare, to deny it is akin to saying the world is flat!

    Communist states personify welfare states. Are you for real?

  • rate this

    Comment number 129.

    128 Arguments concerning the amount spent on welfare & life expectancy go no where. What is clear is the in poorer coutnires life expectancy by & large is shorter whilst in countries which have higher life expectancy there is little correlation between such & income distribution. Life expectancy is determined by all sorts of things but relative welfare betwn say the US & Sweden aint one of them

  • rate this

    Comment number 128.


    I wasn't the one chosing to define communist states as welfare states. I was actually pointing out that we spend more on welfare in the West.

    Shouldn't be hard for you to add some pro-capitalism spin on that, should it?

    Or are you going to follow Sally's lead and focus on far away rather than closer to home?

  • rate this

    Comment number 127.


    "Inspires me to think that just maybe, there are many posters more qualified than those elected."

    Yes that is a comforting thought isn't it ;-)

  • rate this

    Comment number 126.

    "Similar for N.Korea v. S. Korea except it isn't really working, but sanctions have influenced that."

    You are sounding very much like an apologist for every nasty socialist regime to have emerged in the last 50 or so years. Sanctions have nothing to do with Nth Korea's plight. It is a failed state and will go the same way as all socialist regimes with KY hanging from a gable.

  • rate this

    Comment number 125.

    "East Germany had an extensive system, but given the size of their economy, they still spent less than the West. Nevertheless it worked quite well."

    Yes, I've hread their prisons were very comfortable.

  • rate this

    Comment number 124.

    The ECB is becoming the past-master of too little too late. The economics suggest that the euro is the problem yet the politicians decline to accept this reality. Hence we have this endless battle to force the euro to work. The logic of this is now being driven by the consequences of euro collapse. That would be the real disaster as after that anything could happen and we don't want to go there

  • rate this

    Comment number 123.


    You disagree with facts? Erm, ok then.

    The state was, by and large, not paying for welfare in either the USSR or Maoist China.

    East Germany had an extensive system, but given the size of their economy, they still spent less than the West. Nevertheless it worked quite well.

    Similar for N.Korea v. S. Korea except it isn't really working, but sanctions have influenced that.

  • rate this

    Comment number 122.

    Whilst monitoring posters commenting on important economic issues over the last three quarters, or so, I have to say that a significant number of posters comments seem financially sensible. And I have to say, some predictions have been very, very acccurate even when in contra to Government stance. Inspires me to think that just maybe, there are many posters more qualified than those elected.

  • rate this

    Comment number 121.

    The deathly rate of action by the ecb is not, i believe, a product of caution but of political paralysis. It is clear that if the eu economy is contracting and inflation is 1.2%, money should be made as cheap as possible as quickly as possible. This is not wise heads making decisions beyond our ken, but incompetent bureaucracy.

  • rate this

    Comment number 120.

    Are you confused? Look up the figures and I think you'll find the nations with the most welfare were the longer lived.
    Sorry but, I disagree.
    I listed the nations with the most welfare @77, and compared with their freer-nation counterparts listed there - they definitely did not live longer. Their lives were much shorter, and considerably less comfortable.

  • rate this

    Comment number 119.

    Some rough, very rough and slanted, numbers being discussed yesterday rolled around with interest rates. If the US go up to about 4%, interest on govt debt hits about $850 billion annually. Which should make everyone wonder about austerity and unemployment.

    The EU approach is very close to provoking the asset value crash in property that corrected in the US.

  • rate this

    Comment number 118.

    Could the EU please issue more bad news. My portfolio's gone stratospheric!

  • rate this

    Comment number 117.

    FRB predates capitalism
    Customers demand is always present but, it's production that varies. Savings & production, not spending, drive an economy.

    Japan crashed 20 years ago, then BoJ suppressed rates to induce spending &. This induced cheap debt, which people are trying to pay down (deflationary). When the rates go up even a mere 5% = hyperinflation begins.


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