September 24, 2020

Ray of Light in European Economic Data

FRANKFURT — In what passes for good news in Europe these days, a survey Monday showed that manufacturing in the euro zone was deteriorating more gradually than preliminary estimates had indicated. The slight improvement in economic data fed hope that the euro zone was in a temporary downturn and not stuck in a recession that could last for years.

The data, along with an expression of mild optimism by the president of the European Central Bank, suggested that makers of monetary policy were likely to continue to resist calls for more forceful action to prevent the euro zone from slipping into long-term torpor.

“The economic situation in the euro area remains challenging but there are a few signs of a possible stabilization,” Mario Draghi, the president of the E.C.B., said Monday at a conference in Shanghai. The central bank still expects “a very gradual recovery starting in the latter part of this year,” he said.

The E.C.B. will hold its regular monetary policy meeting on Thursday, but the chances of a rate cut or other action, which were already slim, fell after the release Monday of a survey of purchasing managers by Markit, a data provider. The Markit data pointed to a continued decline in economic activity, but at a slower rate than before.

Despite such tentative signs of improvement, a growing chorus of economists is warning that the euro zone could be facing prolonged stagnation of the kind that has gripped Japan for decades. They have asked the E.C.B. to act more aggressively to stimulate lending to struggling businesses in countries like Spain and Italy. Lack of credit is making it impossible for many businesses to invest in expansion or hire more workers.

“We do think more could be done by the E.C.B” to unlock credit in the struggling countries, Nemat Shafik, deputy managing director of the International Monetary Fund, said at a gathering of economists and policy makers in the northern Italian town of Trento on Sunday, Reuters reported.

The I.M.F. continued to express concern about prospects for the euro zone economy. In a separate report published Monday, the organization said it expected Germany to grow only 0.3 percent this year, half its previous forecast. Recession in the rest of the euro zone has made German businesses reluctant to invest, the I.M.F. said. The organization has forecast that the euro zone as a whole will decline by 0.25 percent this year.

The E.C.B.’s options to stimulate the euro zone economy are limited, however. Last month, the central bank cut the benchmark interest rate to 0.5 percent from 0.75 percent. Most analysts do not expect the rate to fall again this month.

There has also been speculation that the central bank could buy packages of outstanding commercial loans known as asset-backed securities, as a way to push down interest rates. Mr. Draghi has said that the E.C.B. is exploring ways to stimulate the moribund market for asset-backed securities.

However, such unconventional action would risk a split on the E.C.B. governing council between members who would like to effectively print money and conservatives led by the Bundesbank, the German central bank, who fear inflation. That potential dispute has kept the E.C.B. from embarking on the same large-scale intervention as other central banks like the U.S. Federal Reserve and the Bank of England, which bought huge swaths of bonds in an effort to bring down rates and stimulate economic growth, a practice known as quantitative easing.

Mr. Draghi said in Shanghai that there were limits to what the E.C.B. could do to repair troubled economies. He again urged political leaders to remove barriers to hiring and firing and take other steps to promote growth. “It is the responsibility of national governments to eliminate uncertainty about growth and the sustainability of public finances,” Mr. Draghi said.

Germany, under pressure to deploy its economic strength to help its troubled euro zone allies, is considering a program that would funnel €1 billion, or $1.3 billion, in loans to small and medium businesses in Spain, The Associated Press reported, citing a document it had seen.

Germany also faced criticism for holding up progress on a so-called banking union that would centralize bank regulation and establish a way to close ailing banks without burdening taxpayers.

Ahead of national elections this autumn, Chancellor Angela Merkel of Germany is anxious to avoid any appearance that voters might be liable for banking problems in other countries, said Mujtaba Rahman, director for Europe at Eurasia Group, a political risk consultancy.

“Agreement on the two most important political questions — who decides and who pays — is still a long way off,” Mr. Rahman said in a note to clients.

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