ECB Holds Rate, Euro falls
While Washington continues to embarrass the world’s largest economy, the ECB released a dismal projection for the euro zone economy in 2013. The forecast has the ECB considering an interest rate cut to help countries trim their borrowing costs. Bad economic news in Europe spells big trouble for American business, which ships more products to the region than any other area.
In meetings with the ECB’s Governing Council, President Mario Draghi entertained a discussion about not only paring interest rates but also about cutting the deposit rate. In the end, the ECB took no action but Draghi is holding the door open on both possibilities. The historically low lending rate of 0.75 percent remains in effect. This rate has prevailed for the past five months but has not done much to fuel economic growth.
The ECB reported their projections for the euro zone showing that Gross Domestic Product (GDP) would fall between -0.9 and +0.3 percent in 2013. In a region that definitely needs growth, hopes are dim.
Berenberg Bank spokesperson Holger Schmieding told reporters, “The somewhat downbeat ECB forecasts, the somber tone of the ECB statement and Draghi’s admission that the ECB had a ‘wide discussion’ over many issues including a potential rate cut also keep the door open for a cut in early 2013.”
The euro zone and European Union have watchful eyes on the Fiscal Cliff negotiations, or lack thereof. As an importer and exporter, the US negotiations are making analysts work overtime to figure the repercussions of the US debt negotiations. The euro zone is clearly counting on the world’s largest economy to be running at optimum speed in 2013. A failure to do so would not only put the US in recession but would have the same effect on the euro zone and other economies.
One positive outcome of the ECB meeting was that Draghi indicated that the bank would continue to supply euro zone banks with necessary liquidity through the middle of 2013.
Now that the European Union and the IMF have taken action to help Greece, the ECB will be challenged to navigate through a regional recession. Inflation is expected to rise between 1.1 and 2.1 percent in 2013.
Euro zone interest rates vary greatly in the 17 nations. The ECB hopes that its continued reduced rates will stabilize nationals lending rates and reduce them as much as possible. But, like the US where corporations are sitting on more than $2 trillion in capital reserves, euro zone businesses are hoarding their cash. They remain unconvinced that the region’s debt crisis will settle and are prepared for worst case scenarios.
The euro zone’s most puzzling dilemma is Spain. The country is suffering 25 percent unemployment and is in the midst of national outrage and even threats of secession. The ECB has a new debt relief program called the Outright Monetary Transactions (OMT). Under this mechanism, Spain could receive funding assistance.
However, Prime Minister Mariano Rajoy must apply to the euro zone for assistance. Rajoy has asked Draghi to guarantee that borrowing costs would not increase, a commitment Draghi cannot make. Spain would be the first nation to use the OMT.
In the euro zone, the political dialogue has lessened. In the US, Republicans have walked out of Congress and Washington. Talks appear to be stalled and the fiscal cliff is becoming a little too real for Americans.