FRANKFURT – European Central Bank President Mario Draghi has warned that the economic outlook for the 17 countries that use the euro remains weak in spite of the “visibly improved” confidence in the region’s financial markets.
Draghi spoke Thursday after the bank’s governing council left its key interest rate unchanged at the record low of 0.75 per cent.
The ECB chief underlined the bank’s position that it has done enough to haul the eurozone out of its financial crisis by offering to buy up the bonds of countries struggling with their borrowing costs, such as Spain and Italy. He repeated his call for governments to get things moving by fixing their shaky 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” to buy unlimited amounts of short-term bonds, Draghi told a press conference in Frankfurt.
Stocks and bonds have risen since the ECB said it was willing to buy bonds issued by heavily indebted countries, lowering their borrowing costs and easing fears of a eurozone collapse. 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 per cent, up marginally on recent days but still way down from the unsustainable highs of 7 per cent it reached in July.
However, the currency union’s economy still shows signs of struggling. The region’s gross domestic product shrank 0.3 per cent in the second quarter. The European Union’s executive commission predicts it will shrink 0.4 per cent this year, and, perhaps more alarmingly, grow a meagre 0.1 per cent all of next year. That means downturns and high unemployment into 2014 at least.
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.
However, some analysts expect the ECB president could cut rates further.
“Draghi appeared to ease open the door to a cut in interest rates over the coming months and potentially as soon as December,” said Howard Archer, chief European economist at IHS Global Insight.
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 per cent and 55.6 per cent respectively for people under 25.