THE ASSOCIATED PRESS
Published — Friday 11 January 2013
Last update 11 January 2013 12:55 am
FRANKFURT: European Central Bank President Mario Draghi says the struggling euro zone economy has shown signs of stabilizing in recent days but remains short of a turning point and will only return to gradual growth later this year.
Draghi spoke after the bank's 23-member governing council left its key interest rate unchanged at a record low of 0.75 percent.
A further cut would in theory encourage more economic activity by making it easier for consumers and businesses to borrow, spend and invest. But Draghi said at a post-meeting news conference that rates were already low enough to spur growth — and would contribute to a gradual rebound.
The decision to hold off rates and the news that the decision was unanimous caused the euro, the currency used by 17 EU countries, to rally 1 percent to $1.3191. A currency's value usually tracks expectations of interest rates.
Draghi said some economic indicators "have broadly stabilized," although at low levels, and financial markets have steadied. "Economic activity should gradually recover" later this year, he said.
But, he added, "to define a turning point you need a lot of things beside financial market stabilization." For that, the euro zone needs "greater strength in the economy."
The bank sets monetary policy for the euro zone and its 333 million people. Its key move to ease the euro zone's crisis over too much government debt was an offer finalized in September to buy the bonds of heavily indebted countries, on condition that they tap a European financial aid program and promise to reduce their deficits. No country has asked for the help, but the mere offer has seen dramatic falls in bond market borrowing costs for Spain and Italy.
European leaders are also setting up a new system to have the ECB monitor European banks centrally. The hope is that greater controls will keep banks' financial troubles from requiring national governments to make expensive bailouts that overwhelm public finances.
All these steps have helped calm fears that the euro zone will break up or suffer a renewed financial crisis through a government being unable to pay its debts. Now the focus has turned to economic growth, or rather the lack of it. The euro zone economy shrank in both the second and third quarters, technically putting it in recession, and most think the fourth quarter will be no different when figures come out next month.
Draghi ticked off a list of improvements. They included lower bond market borrowing costs for governments, reflecting increased confidence they can pay their debts; rising stock markets, and a flow of deposits back into banks in the most troubled countries. Greece, Ireland, and Portugal have taken bailout loans from other countries and the International Monetary Fund. Cyprus is currently negotiating one.
It is now up to governments to get their economies to grow, Draghi said. The chief risk to the expected recovery is "slow implementation of structural reforms in the euro area."
While governments have made "substantial, significant progress, they have to continue, particularly on the structural side," he said. Structural reforms include making labor markets more flexible and cutting red tape.
While governments have cut spending, they have been slower to enact longer term reforms such as ending two-tier labor markets where older workers have strong protections but companies are reluctant to hire young ones because they can't shed workers in a downturn.
Meanwhile, the European Central Bank held interest rates at a record low of 0.75 percent yesterday, refraining from a cut following fledgling signs of life in the euro zone economy and with inflation still above target.
The Bank of England left its monetary policy settings unchanged yesterday while it awaits clearer signals on the state of Britain's economy and more news on the progress of a key scheme to boost lending.
After a two-day meeting, the BoE's nine-member Monetary Policy Committee (MPC) said its main interest rate would stay at a record-low 0.5 percent and it would not buy any government bonds on top of the 375 billion pounds ($600 billion) purchased so far.