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This month, The European Central bank reduced its key lending rate to 0.25%, a record low. This move came days after the October inflation report fanned fears that the euro zone may slip into a period of excessively low inflation or, in some places, persistent declines in consumer prices, known as deflation. This cripples economic activity by holding wages and profits down and hampering efforts by the private sector and governments to reduce debt. Some of the countries hit hardest by the euro zone's debt crisis, including Ireland, Greece, Cyprus and Spain, have inflation rates of zero or lower. The ECB could do more if necessary, Mr. Praet said. "On standard measures, interest rates, we still have room and that would also include the deposit facility," he said. The central bank's deposit rate has been set at zero for several months. Making it negative would effectively levy a fee on commercial banks that park funds at the ECB. That would be aimed at spurring bank lending to the private sector, which would boost growth and inflation. However, a negative deposit rate would also weigh on bank profits. However, another option is to make more cash available to financial institutions, as it has in the past with cheap, long-term loans, known as LTROs, Mr. Praet said. All in all The ECB has so far resisted large-scale asset purchases as a means to boost growth. In a recent press release, Mr. Draghi stated that The European Central Bank could adopt negative interest rates or purchase assets from banks if needed to lift inflation closer to its target, a top ECB official said, rebutting concerns that the central bank is running out of tools or is unwilling to use them. "If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate. That's a very clear signal," ECB executive board member Peter Praet said in an interview Tuesday with The Wall Street Journal. Mr. Praet didn't rule out what some analysts see as the strongest, and most controversial, option: purchases of assets from banks to reduce borrowing costs in the private sector. "The balance-sheet capacity of the central bank can also be used," said Mr. Praet, whose views carry added weight as he also heads the ECB's powerful economics division. "This includes outright purchases that any central bank can do." Additional stimulus from the ECB isn't needed right now, Mr. Praet signaled, noting that inflation risks for the euro zone as a whole are balanced after last week's unexpected ECB interest-rate cut.
The ECB purchased safe bank and government bonds at the height of the global financial crisis and Europe's sovereign-debt crisis, but in small amounts compared with other major central banks. Such bond purchases are deeply unpopular in Germany, where long-standing fears of inflation inspire doubts about easy-money policies. Jens Weidmann, who heads the German central bank as well as serving on the ECB's Governing Council, opposed the ECB's decision last year to create a program to buy government bonds. Nevertheless, the program, which hasn't even been used, has been widely credited with helping calm the bloc's debt crisis. The ECB's charter forbids it from financing governments, and Mr. Praet said the bank must respect such legal constraints. However the rules "do not exclude that you intervene in the markets outright," he said. Mr. Weidmann was also in the minority of ECB officials who opposed last week's rate reduction, preferring to wait for more information on the inflation outlook. This has led to some concern that if the ECB can't unanimously agree on a cut to its key lending rate, reaching consensus on more outside-thebox monetary policies will prove tricky. "For some decisions it's easier than others" to gain consensus, Mr. Praet said. "One thing is clear: the Governing Council has been able to decide. That's really the message." The need for more aggressive stimulus is increasingly being debated by economists and investors. Mr. Praet rejected fears, particularly in Germany, that low ECB interest rates harm savers by reducing the interest rate they earn on deposits. Low interest rates tend to favor borrowers over savers. "Creditors and debtors always have an interest in a stable anchor, which is price stability in the medium term," Mr. Praet said. "The action to reduce uncertainty is good for the climate for savers." The single currency dropped as low as $1.3391 from $1.3455 just minutes after Mr. Praet's comments appeared on the Wall Street Journal's website. It was trading later at $1.3404, down 0.2% from where it traded late Tuesday in New York.
“ Subdued growth” expected for the European Union Member States next year
The European Union expert economists said in a joint press release that “subdued growth”, whatever that means, will likely keep the bloc's unemployment rate near record highs through 2015, as privatesector debt-cutting and government austerity continue to weigh on consumer spending and business investment. EU economists also predict that the economic imbalances at the root of the euro-zone crisis, though diminished, will persist. Germany's current-account surplus is forecast to remain the largest of the world's major economies, making it likely that Berlin will come under new pressure from Brussels to tame its export-dominated growth mode. Jobseekers wait to see job advisers inside a Pole Emploi, the French national employment center, in Strasbourg, France, on Aug. 2. The EU said Tuesday that the bloc's unemployment rate would remain near record highs through 2015. Bloomberg News Yet it is unclear whether the European Commission, the EU's executive arm, which polices the bloc's economic rules, will mount a stiff challenge to Europe's most powerful economy. The EU Commission said that the bloc's economy would grow next year as recessions in countries such as Greece will end. However Bloomberg News quotes Olli Rehn, the EU's 2
economics commissioner: "We need a policy debate, not necessarily a politically motivated debate on this very important issue". Even the commission's economists downgraded their expectations for eurozone growth next year to 1.1%, from the 1.2% they had forecast in the spring. The forecast for 2015 is 1.7%. These forecasts serve as the foundation for budget negotiations between EU authorities in Brussels and national capitals. Rules intended to prevent a repeat of the sovereign-debt crisis for the first time this year allow Brussels to review budgets before they are submitted to national parliaments. The new forecasts may add pressure on the government of French President François Hollande to pursue more austerity to meet EU budget deficit targets. Along these lines, Mr. Rehn had given France two extra years, until 2015, to bring its deficit under 3% of annual gross domestic product, as required by EU rules. Tuesday's report forecasts the French deficit to be at 3.7% in 2015. Pierre Moscovici, the French finance minister, said that the commission's forecast for 2015 doesn't account for spending cuts the government is planning. He said he would discuss the differences with the commission soon. "I'm convinced we'll find common ground in the coming weeks," Mr. Moscovici said at a news conference. "Getting the deficit under 3% in 2015 is a credible and strong commitment." Spain is also forecast to miss its budget target by a wide margin, possibly requiring more budget cuts. The government's latest fiscal plan, negotiated with EU authorities, aims to cut the deficit to 4.1% of GDP in 2015. The commission's report forecasts the Spanish deficit at 6.6% of GDP in 2015. However and obviously preferentially, The European Commission has in the past, given more time to both France and Spain because their budget deficits have been temporarily inflated by their weak economies, let alone the erroneous reporting, and false accounting results published on purpose, in order to keep the Euro strong and the general feeling that “all is well” alive. The Economists reports predict that 2013 will mark the euro zone's third year of economic contraction out of the last five. Next year, however, the bloc's economy is expected to grow, as years of recession end in some of the crisis-hit economies—Greece, Portugal and Spain. Still, those countries could be left with unemployment rates well above 15% for years, as it stands. Growth in the biggest euro-zone economies, Germany and France, will be relatively weak, the reports ouline, and the Union apparently has not enough power, knowledge and raw data to engineer a strong recovery in the weakest euro-zone countries. European banks, households and corporations are under pressure to reduce their debts, a process of "deleveraging" that will weigh on consumption and investment, the forecasters said. Some private economists say that stronger domestic demand, particularly in Germany, is “ key” to helping the bloc's weak economies recover. Germany's large trade and current-account surpluses have become a topic of rising controversy, after the U.S. Treasury criticized Germany for not doing enough to spur domestic consumption and investment. But the report offers little hint of a big shift in Germany. Domestic demand is seen rising just 2% next year, while the country's current-account surplus—the broadest measure of trade in goods, services and financial flows—is forecast to remain over 6% of GDP this year and next—near a record high since the creation of the euro. EU rules call for governments with current-account surpluses exceeding 6% of GDP on average 3
for the three previous years to take steps to lower it. According to the latest data, Germany exceeds that threshold, though the commission has yet to make a formal determination. "To open the bottlenecks to the growth of domestic demand, Germany should create the conditions for sustained wage growth, for instance by reducing high taxes and social-security contributions, especially for low-wage earners," Mr. Rehn said. "Boosting investment in infrastructure will help sustain domestic demand." However, Mr. Rehn didn't mention one of the main proposals now under discussion in Germany that would boost domestic demand: a minimum wage. The Social Democrats have refused to form a coalition with the Christian Democrats of German Chancellor Angela Merkel without a pledge that the coalition would back a nationwide minimum wage of €8.50, or about $11.45.
Data: November 21. 2013
Mircea Halaciuga, Esq. 0040-724.58.1078 www.SIPG.ro
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