Europe: a cautious rate cut

ECB President Mario Draghi There are limits to the help Mr Draghi can give to the struggling eurozone

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For the first time in 10 months the European Central Bank has cut its main interest rate, from 0.75% to 0.50%. It is now at an all-time low.

Some had expected a larger cut, in response to growing anxiety in Europe over growth and unemployment.

The President of the ECB, Mario Draghi, said: "labour markets remain weak... Weak economic sentiment has extended into the spring of this year". Mr Draghi expects recovery later in the year, but that has been predicted before.

Suddenly - or so it seems - everyone's priority is growth and employment. The austerity fetishists have left the stage - almost. Today it was the turn of the President of the European Council, Herman Van Rompuy, to say that "after three years of firefighting, patience with austerity is understandably wearing thin".

Only this morning the new Italian Prime Minister Enrico Letta was in Brussels. He was once again direct, as he has been since taking office. "Youth unemployment," he said, "that is the real nightmare of my country and the EU".

Official heads nodded in agreement but, at some stage, there will have to be an accounting. How did Europe end with unemployment for under 25-year-olds at 59% in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal? Why has it taken so long for official voices to speak up? Could this have been avoided or was this judged to be the price for saving the euro?

And even if youth unemployment was not the focus of attention there is the story of manufacturing. Output declined again in April. Manufacturing in France, Italy and Spain all reported a contraction in manufacturing business. As Mario Draghi said, output has declined for five separate quarters.

The first question after today's rate cut is whether it will make a difference? It boosts confidence certainly. It sends a signal that Europe is making growth its priority, but will these lower costs be passed on to the small and medium-sized companies, which are the engine room of most European economies? In the past the banks - trying to shore up their own defences - have not always passed on lower rates to customers. The ECB recognises that "tight credit conditions" remain for many companies.

If consumer and business confidence remains low then Mario Draghi made it clear that the ECB was ready to act again on rates.

Gavin Hewitt, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 242.

    Interesting --the Welsh UKIP Manifesto requires a log-in ?

    --only wanted to see what their view was on all the English buying their property.

    --nothing sinister intended.

  • rate this

    Comment number 241.

    Gavin Hewitt is so so right, he works for the BBC you know, and hes a very nice person as well

  • rate this

    Comment number 240.

    238"EU is the world's largest and wealthiest economy"

    I guess that explains why the EU didn't take its beggar bowl to the US, China, and the IMF. Actually the US and China turned the EU down. Only the IMF diverted funds from truly needy nations to bail out the world's largest and wealthiest economy. Reason enough for the US to cut all contributions to it.

  • rate this

    Comment number 239.

    Here is a good one !

    "London’s financial services industries pay our pensions, build our hospitals, heat our schools and provide jobs for three million Londoners. We must defend them."

    -- I believe an infamous person had similar ideas towards big business.

    -- also no mentioning of how (or desire) to stop massive tax evasion and avoidance in the UK --also similar tactics to the deceased.

  • rate this

    Comment number 238.

    221 Lucy

    "The Western world giving up its manufacturing to East
    seems to have been its biggest mistake"

    EU is the world's largest and wealthiest economy, first trade power with 1/3 of total, exporter with the richest countries, largest air craft industries, steel dairy fashion beer cosmetics luxury goods mobiles energy paper banking car

    Where do you get your information from?


Comments 5 of 242



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