Draghi Dismisses Any Nation’s Move to Drop the Euro

During the last year, Mario Draghi, president of the bank, has managed to quiet financial markets, cap government borrowing costs and contain the euro zone crisis by making it clear that the bank would not allow the 17-country euro currency union to come apart. But it is not clear what tools he sees at his disposal.

In a news conference, he also gave no indication how the central bank might stimulate the moribund economies of the euro zone. The bank said Thursday that it would leave its benchmark interest rate unchanged. “Cyprus is no turning point in euro policy,” Mr. Draghi said. There is “no Plan B.”

Making sure that “credit will flow to the real economy seems to be the E.C.B.’s No. 1 priority,” Carsten Brzeski, an economist at ING Bank, wrote in a note to investors. “However, judging from today’s news conference, the E.C.B. looks rather clueless on how to tackle the problem.”

The bank left its benchmark interest rate unchanged on Thursday at 0.75 percent, while the Bank of England held its rate steady at 0.5 percent. With both central banks’ rates already at record lows, there might be little room to use interest rates as an economic stimulus. But the euro zone economies, like that of Britain, are stagnant and in need of help wherever they can find it.

Mr. Draghi said the European Central Bank was looking for new ways to stimulate lending in the weak euro zone economy and could move quickly. “We will assess all the data in coming weeks and we stand ready to act,” he said, without offering many clues about what measures he might have in mind.

The global financial crisis in recent years has forced central banks around the world to do much more than simply tweak the official interest rate as they did in the past. On Thursday, Haruhiko Kuroda, the new governor of the Bank of Japan, Japan’s central bank, announced that it would seek to double the amount of money in circulation over two years to try to end years of falling prices.

Mr. Draghi said there was a consensus among the 23 members of the European Central Bank’s governing council not to cut rates even lower “for the time being.” The bank also discussed other, unconventional ways to help countries where credit remained tight, he said.

“The experiences of other countries tell us we have to think deeply before we can come up with something useful and consistent within our mandate,” he said.

Large-scale purchases of corporate debt, which the Federal Reserve has used to stimulate lending in the United States, would be more difficult in Europe because most companies get their credit directly from banks, Mr. Draghi indicated.

With inflation already below the European bank’s target of about 2 percent, some analysts have worried that the euro zone faces a risk of deflation — a broad decline in prices that can be more destructive and difficult to cure than inflation. Mr. Draghi said, however, that risks to price stability were “broadly balanced,” indicating that he did not see a major risk of deflation.

Data from Markit, a research firm, confirmed the continued downturn on Thursday. Its survey of business activity showed a marked drop in France and a stalling of growth in Germany, the largest and most robust economy in the euro zone.

Mr. Draghi predicted that the euro zone would recover, but he sounded slightly less confident than in the past. “Tight credit conditions,” he said, “will continue to weigh on economic activity.”

The Bank of England’s decision to keep the benchmark interest rate unchanged on Thursday was made despite concern that new data might show that the British economy fell back into recession at the start of the year.

Mr. Draghi found himself devoting much of the hourlong news conference to trying to dispel fears that Cyprus represented an ominous new phase of the euro zone crisis.

Mr. Draghi acknowledged that an initial decision by officials from the European Union, the International Monetary Fund and the central bank to impose a tax on small bank deposits was “not smart, to say the least.” But he pointed out that euro zone officials had quickly corrected that error.

At the same time, he defended the decision that did stick: to place much of the burden of bailing out Cyprus banks on large depositors. In a long discourse on the lessons of Cyprus, he said it showed the need for centralized banking supervision that would enable regulators to detect problems before they became a broader threat.

While European leaders have agreed to give the central bank power to oversee euro zone banks, they remain divided on measures to protect depositors and to deal with failed financial institutions.

Mr. Draghi warned that countries where banking risk was several times larger than the economy — as in Cyprus, Britain and Luxembourg — were especially vulnerable. Those countries have to be more conservative, he said, avoiding large budget deficits and ensuring that the banks have ample capital buffers. “If anything, the events on Cyprus have reinforced the governing council’s determination to support the euro while maintaining price stability and acting within our mandate,” he said. The muted market reaction to events in Cyprus, he said, showed that “we are now in a position to cope with serious crises without them becoming existential or systemic.”

He said no country in the euro zone would be better off leaving the euro, as some commentators have suggested. “What was wrong with Cypriot economy doesn’t stop being wrong if they are outside of the euro,” Mr. Draghi said. “An exit entails many risks — big risks.”

Melissa Eddy reported from Frankfurt and Jack Ewing from London. Julia Werdigier contributed reporting from London.

Article source: http://www.nytimes.com/2013/04/05/business/global/european-central-bank-holds-steady-on-interest-rate.html?partner=rss&emc=rss