ECB Expects No Recovery Before 2010

Discussion in 'Economics' started by ASusilovic, Jun 10, 2009.

  1. LUXEMBOURG -- The European Central Bank expects further financial-sector weakness could help keep the euro-zone economy from expanding before the middle of next year, a top policy maker said in an interview.

    ECB officials believe the euro-zone recession could weaken the 16-nation bloc's strained banking system. "That is the reason why we are also cautious about the gradual recovery path in our scenario," said Yves Mersch, who sits on the ECB's 22-member Governing Council.

    Mr. Mersch, head of Luxembourg's central bank, is a lawyer and political scientist whose influence on ECB policy exceeds the tiny nation's importance in the euro zone's economy.

    In the interview, he said financial-sector weakness, which could push more European banks to fail, is "already penciled in" to policy makers' calculations. He suggested policy makers see their role shifting from actively shoring up the bloc's financial system and economy to monitoring the effect of measures they have taken.

    "We must move away from an announcement policy to an implementation policy," Mr. Mersch said.

    "But if the ceiling is falling on our head," he added, noting developments could turn out worse than the central bank expects, "we have to change."

    In May, the ECB cut its key rate to a record low of 1% and announced a program to buy €60 billion ($83 billion) in low-risk bonds. Central banks in the U.K. and U.S. have taken their key rates close to zero and launched broader asset-purchase programs to boost economic activity.

    The prospect that a worse-than-expected downturn could throttle European banks is spurring concern outside the bloc. The International Monetary Fund warned Monday that financial-sector weakness could thwart the euro zone's economic recovery. U.S. Treasury Secretary Timothy Geithner will press the Obama administration's case for European authorities to run tougher bank stress tests at a meeting of finance ministers from the Group of Eight leading nations at a meeting in Italy this week.