December 6, 2019

Draghi Signals Slight Optimism for Europe’s Prospects

“The picture seems to be better from all angles than it was a year ago,” Mr. Draghi said at a news conference after the E.C.B.’s decision to leave its benchmark interest rate unchanged at a record low of 0.5 percent.

Mr. Draghi was referring to questions about the euro zone’s integrity, though, and less to the immediate prospects for an end to recession and record unemployment.

The fragile state of the euro zone economy means that any decision to raise interest rates is still a long way off, Mr. Draghi indicated. Policy makers expect “the key E.C.B. interest rates to remain at present or lower levels for an extended period of time,” Mr. Draghi said, repeating a pledge he first made a month earlier.

In London on Thursday, Britain’s central bank, the Bank of England, also decided to hold interest rates steady.

The Bank of England held its interest rate at 0.5 percent, already a record low, and made no change to its program of economic stimulus, leaving the target at £375 billion, or about $570 billion. In Britain, which does not use the euro, the government had reported last week that the economy grew 0.6 percent in the second quarter from the previous quarter and that all main industries were reporting faster growth for the first time in three years.

For Mr. Draghi, it has been about a year since he defused fears of a euro zone breakup by promising to do “whatever it takes” to keep the common currency together. That expression of resolve helped check the euro zone’s decline, but was not enough to push the region onto a growth pathagain.

Asked to take stock of the state of the euro zone today, Mr. Draghi listed numerous improvements, including stronger exports from countries like Spain and Italy; lower market interest rates for government bonds; and progress by political leaders in reducing their deficits and improving economic performance.

“We are seeing possibly the first signs this significant improvement in confidence and interest rates is finding its way to the economy,” Mr. Draghi said.

But he took a more cautious view than many analysts of recent surveys of business sentiment, which have raised hopes that the euro zone economy could be emerging from recession. The surveys “tentatively confirm the expectation of a stabilization of economic activity at low levels,” Mr. Draghi said.

At least one analyst detected a nuanced shift in Mr. Draghi’s assessment.

“If there was any change at all, his description of economic prospects sounded slightly more optimistic,” Jörg Krämer, chief economist at Commerzbank in Frankfurt, said in a note to clients.

“Slightly” is the key word. Credit for businesses remains scarce, Mr. Draghi noted, and the labor market is weak. Unemployment in the euro zone was stuck at a record high of 12.1 percent in June, according to official data published Wednesday, though there was an infinitesimal decline in the total number of jobless people: 24,000 fewer people were out of work in May out of a total of 19 million.

Even if the euro zone economy does emerge from recession soon, economists say, growth will be weak and it will take years before joblessness in countries like Spain — where more than a quarter of the work force is unemployed — returns to tolerable levels.

With E.C.B. interest rates already at record lows, Mr. Draghi has in recent months been trying to use his powers of persuasion to talk down market rates and make credit more available to businesses and consumers. Last month, he broke with precedent by promising to keep rates low for an extended period. Before then, the E.C.B. had refused to offer so-called forward guidance.

Julia Werdigier contributed reporting from London.

Article source: http://www.nytimes.com/2013/08/02/business/global/european-central-bank-keeps-key-rate-at-0-5.html?partner=rss&emc=rss

Central Banks of Europe and England Pledge to Keep Rates Low for a While

The bid to reassure investors brought the two central banks into closer alignment with the Federal Reserve, which, under Chairman Ben S. Bernanke, has adopted a policy of becoming more open about its intentions.

At the same time, they appeared eager to signal that they would not follow the Fed in preparing for a gradual withdrawal of economic stimulus.

Mario Draghi, the president of the European Central Bank, said at a news conference that crucial interest rates would “remain at present or lower levels for an extended period of time.” Until Thursday, the central bank had steadfastly refused to pin itself down on future policy.

“It’s not six months,” Mr. Draghi said. “It’s not 12 months. It’s an extended period of time.”

Mr. Draghi also said that the central bank was signaling a “downward bias” in interest rate policy, meaning further cuts were possible or even likely.

Only hours earlier, Mark J. Carney, who became governor of the Bank of England on Monday, made a similar break with tradition. The British central bank said in a statement that any expectations that interest rates would rise soon from their current record low level were misguided.

With their promises of easy money stretching toward the horizon, the central bankers offered more certainty to investors at a time when tensions in Europe are rising again. So-called forward guidance is considered one of the tools available to central banks, but it was one the European Central Bank and the Bank of England had not used before.

European markets reacted positively to the announcements, with the FTSE 100 in London closing 3.1 percent higher and the Euro Stoxx 50, a benchmark of euro zone blue chips, climbing 3 percent. (Markets in the United States were closed for the Fourth of July holiday.) The euro fell sharply, a development that was probably not unwelcome at the European Central Bank, since a cheaper euro makes European products less expensive in foreign markets, feeding exports. The British pound also fell.

Mr. Draghi said it was a coincidence that his central bank and Bank of England introduced forward guidance on the same day. Both left their main interest rates at 0.5 percent and did not announce any other policy moves. It was a day for talk rather than action.

“Mr. Draghi did what he does best today: intervene verbally to great effect,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in a note.

Mr. Draghi’s statement on Thursday came almost a year after he defused the euro zone debt crisis with a promise to do “whatever it takes” to preserve the currency union.

But after months of relative calm, Europe has been rattled in recent days by a political crisis in Portugal, which has raised questions about whether the region’s governments will be able to withstand popular discontent with their policies of cutting budgets to bring public debt under control. Investors have responded by pushing up the risk premium they demand on bonds issued by Italy, Spain and other troubled euro zone countries. Market rates on Italian and Spanish bonds retreated on Thursday after Mr. Draghi’s comments.

The commitment to keep rates low helps amplify the effect of rates that are already nearly rock bottom, by reassuring investors that they can count on easy money for the foreseeable future.

But some analysts saw Mr. Draghi’s statement as a bluff — a tacit admission that the central bank has run out of other ways to stimulate the euro zone economy.

“A change of a few words in the way he phrases the E.C.B.’s policy stance is an insufficient policy response to alter the — very troubled — course of the euroland economy,” Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said in an e-mail.

Jack Ewing reported from Frankfurt, and Julia Werdigier from London.

Article source: http://www.nytimes.com/2013/07/05/business/global/central-banks-of-europe-and-england-pledge-to-keep-rates-low-for-a-while.html?partner=rss&emc=rss

2 Central Banks Promise to Keep Rates Low

The bid to reassure investors brought the two central banks into closer alignment with the Federal Reserve, which, under Chairman Ben S. Bernanke, has become more open about its intentions.

At the same time, they appeared eager to signal that they would not follow the Fed in preparing for a gradual withdrawal of economic stimulus.

Mario Draghi, the president of the European Central Bank, based in Frankurt, said at a news conference that crucial interest rates would “remain at present or lower levels for an extended period of time.” Until Thursday, the bank had steadfastly refused to pin itself down on future policy.

“It’s not six months,” Mr. Draghi said. “It’s not 12 months. It’s an extended period of time.”

Mr. Draghi also said that the central bank was signaling a “downward bias” in interest rate policy, meaning further cuts were possible or even likely.

Only hours earlier, Mark J. Carney, who became governor of the Bank of England on Monday, made a similar break with tradition. The British central bank said in a statement that any expectations that interest rates would rise soon from their current record low level were misguided.

With their promises of easy money stretching toward the horizon, the central bankers offered more certainty to investors at a time when tensions in Europe are rising again. So-called forward guidance is considered one of the tools available to central banks, but it was one the European Central Bank and the Bank of England had not used before.

European markets reacted positively to the announcements, with the FTSE 100 in London closing 3.1 percent higher and the Euro Stoxx 50, a benchmark of euro zone blue chips, climbing 3 percent. (Markets in the United States were closed for the Fourth of July holiday.) The euro fell sharply, a development that was probably not unwelcome at the European Central Bank, since a cheaper euro makes European products less expensive in foreign markets, feeding exports. The British pound also fell.

Mr. Draghi said it was a coincidence that his central bank and Bank of England introduced forward guidance on the same day. Both left their main interest rates at 0.5 percent and did not announce any other policy moves. It was a day for talk rather than action.

“Mr. Draghi did what he does best today: intervene verbally to great effect,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in a note.

Mr. Draghi’s statement on Thursday came almost a year after he defused the euro zone debt crisis with a promise to do “whatever it takes” to preserve the currency union.

But after months of relative calm, Europe has been rattled in recent days by a political crisis in Portugal, which has raised questions about whether the region’s governments will be able to withstand popular discontent with their policies of cutting budgets to bring public debt under control. Investors have responded by pushing up the risk premium they demand on bonds issued by Italy, Spain and other troubled euro zone countries. Market rates on Italian and Spanish bonds retreated on Thursday after Mr. Draghi’s comments.

The commitment to keep rates low helps amplify the effect of rates that are already nearly rock bottom, by reassuring investors that they can count on easy money for the foreseeable future.

But some analysts saw Mr. Draghi’s statement as a bluff — a tacit admission that the central bank has run out of other ways to stimulate the euro zone economy.

“A change of a few words in the way he phrases the E.C.B.’s policy stance is an insufficient policy response to alter the — very troubled — course of the euroland economy,” Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said in an e-mail.

Jack Ewing reported from Frankfurt, and Julia Werdigier from London.

Article source: http://www.nytimes.com/2013/07/05/business/global/central-banks-of-europe-and-england-pledge-to-keep-rates-low-for-a-while.html?partner=rss&emc=rss

European Central Bank Debates Options, but Stands Pat

The lack of any action illustrated the gulf between those at the central bank who expect a recovery, even if weak, by the euro zone economy — which has been shrinking for a year and a half — and economists and central bankers elsewhere who fear that the euro zone is sinking ever deeper into stagnation.

Mario Draghi, the president of the E.C.B., said at a news conference Thursday that the bank’s Governing Council, meeting earlier in the day, had an “ample discussion” about measures to stimulate the economy. Those, he said, included even taking the unprecedented step of imposing a de facto penalty on commercial banks that hoard cash rather than lend it.

But amid uncertainty about what recent economic indicators are saying about future growth, “we see no reason to act at this point,” Mr. Draghi said at a news conference.

“The Governing Council agreed there was not any directional change that would justify taking action at this time,” he said, even as the E.C.B.’s own economists changed their economic forecast to a gloomier reading for the rest of the year.

The downward revision projected that the euro zone’s economy would shrink by 0.6 percent this year, worse than the 0.5 percent decline previously forecast. But the central bank expects growth in the euro zone of 1.1 percent next year, slightly higher than previous forecasts.

The E.C.B. left its main interest rate at 0.5 percent, a record low. Most analysts did not expect the bank to cut the rate only a month after reducing it from 0.75 percent.

In recent months, Mr. Draghi has floated some unconventional ways of steering credit to countries like Italy and Spain, where even healthy companies have trouble getting bank loans. For example, he has raised the possibility that the E.C.B. would work with the publicly owned European Investment Bank to make it easier for banks to package and sell bundles of small-business loans.

The E.C.B. had even said it was considering obliging banks to pay to store their money at the central bank, rather than earn interest on it — resulting in a so-called negative deposit rate. The goal would be to force banks to put their money to work by lending it. Mr. Draghi indicated that the central bank’s Governing Council had considered that move Thursday but decided not to proceed with it.

Economists who have been pressing the central bank to take more aggressive action to stimulate the economy were disappointed.

“The E.C.B. had increased expectations that it would be able to present a new quick fix for the real economy” by increasing lending to small and midsize businesses, Carsten Brzeski, an economist at ING Bank, said in a note to clients. “Today’s press conference shows that the ECB has returned into its garage, carefully studying what is left there.”

During his news conference, Mr. Draghi cited “downside risks surrounding the economic outlook for the euro area.” Those, he said, include the possibility of weaker-than-expected domestic and global demand and slow or insufficient policy changes in euro zone countries.

After Mr. Draghi’s comments, the value of the euro strengthened against the American dollar, settling at $1.3253. European stock markets closed down about 1 percent.

Mr. Draghi made it clear that he did not belong to those who believed the euro zone was heading down the same path as Japan, which has struggled for two decades to achieve sustained growth. Mr. Draghi told reporters that he saw no danger of deflation — a broad decline in prices that can throttle business investment and has afflicted Japan.

Price declines in some countries were the result of lower prices for oil and food, he said, not the “explosive dynamics downward” that would meet his definition of deflation.

“We don’t see anything like that in any country,” Mr. Draghi said.

Some recent economic indicators have kept alive the hope that the euro zone is close to hitting bottom. Surveys have shown that businesses and consumers are a little less pessimistic than they were. And inflation has accelerated slightly, although it is still below the E.C.B. target of about 2 percent.

Many economists point out that signs of a recovery are very weak and have urged the E.C.B. to be bolder. Unemployment remains a persistent problem, with joblessness in the euro zone at a record high of 12.2 percent. France reported on Thursday a 10.8 percent unemployment rate for the first quarter, also a record high.

Marie Diron, an economist who advises the consulting firm Ernst Young, expressed disappointment that the central bank had not done more to ensure that record-low interest rates were reaching businesses and consumers in troubled euro countries, where market rates remained punishingly high. She wrote in an e-mail, “The E.C.B. needs to intervene to ensure that its very accommodative monetary policy reaches the real economy.”

Article source: http://www.nytimes.com/2013/06/07/business/global/ecb-keeps-interest-rates-unchanged-in-hopes-for-recovery.html?partner=rss&emc=rss

Euro’s Strength on Agenda for Finance Ministers

As confidence has grown that the Union will be able to manage its sovereign debt crisis, the euro has made significant gains against the dollar and other foreign currencies. That is making Europe’s exports more expensive, a factor that could hamper growth.

On Monday, France, which traditionally favors market intervention, renewed its calls for remedial steps that could include establishing a target level for the euro’s value.

Exchange rates need “to reflect the economic fundamentals of our economies of the euro zone,” said Pierre Moscovici, the French finance minister. “Exchange rates should not become subjected to moods or speculation.”

Mr. Moscovici made the case to other members of the so-called Eurogroup of finance ministers, asking for coordinated action to keep a lid on the value of the euro currency. Before the meeting, Mr. Moscovici said he wanted the Europeans to present a common plan later this week during a meeting of finance ministers and central bankers of the Group of 20 nations to be held in Moscow.

In a news conference after Monday’s meeting, Jeroen Dijsselbloem, the president of the Eurogroup, who oversees the agenda for the monthly meetings, said the euro exhange rate had been discussed. But like some German officials, he appeared to give the matter short shrift, saying that the forum for further discussion should be the G-20 meeting in Moscow.

“That’s where exchange rates, if anywhere, should be addressed,” Mr. Dijsselbloem said.

Mario Draghi, the president of the European Central Bank, warned last week that the strength of the euro could weigh on the ability of Europe to pull out of its economic doldrums. Those comments were enough to send the euro down sharply against the dollar — to $1.36 from $1.34 — and the yen.

The euro was trading at $1.339 on Monday after falling to the low $1.20s last year.

The renewed French push for greater scope to control the levers of the European economy immediately met stiff resistance from a senior German official, who decried the initiative as a poor substitute for policy overhauls.

Jens Weidmann, the president of the German central bank, the Bundesbank, suggested Monday that countries like France were simply diverting attention from the need to make their economies more competitive.

“Only governments can solve these problems, the central banks cannot,” he added. “In this respect, the discussion about a supposed overvaluation of the euro’s exchange rate simply deviates from the real challenges.”

Mr. Weidmann also warned that an exchange rate policy aimed at weakening the euro would “in the end result in higher inflation.”

A number of ministers agreed Monday that intervention would be wrongheaded.

“This is mainly decided by the market,” Maria Fekter, the Austrian finance minister, said in response to a question on the strong euro as she arrived at the meeting. “I find an artificial weakening unnecessary.”

The strong euro means some European exports, like cars and wine, become more expensive abroad, putting European producers at a disadvantage against foreign competitors. But there are also positive effects. Imports, particularly oil, become less expensive for Europeans, which helps stimulate the economy.

The push for intervention by the French is unlikely to make much real headway. Instead, it may be an illustration of the way that economic policies in the euro area are a result of a back-and-forth between states like France and Germany.

“The French have always believed the single currency should be put to the service of exports,” said Mujtaba Rahman, an analyst with the Eurasia Group, a political risk research and consulting firm. “But it’s not a debate they can win, so they are most likely using this to win concessions on other baby projects, from the pace of its own fiscal consolidation, to a fiscal capacity to a short-term mutualized debt instrument.”

Article source: http://www.nytimes.com/2013/02/12/business/global/euros-strength-on-agenda-for-finance-ministers.html?partner=rss&emc=rss

E.C.B. President’s Comments Send Euro Lower

Mario Draghi, the E.C.B. president, denied that the central bank was trying to influence the value of the euro, no doubt mindful of provoking a currency war with Japan or the United States. But he then made statements that investors interpreted as meaning the E.C.B. could take action if the euro rose too much.

“The exchange rate is not a policy target, but it is important for growth and price stability,” Mr. Draghi said at a news conference after the regular monthly policy meeting of the E.C.B.’s Governing Council, in which the central bank left its main interest rate at 0.75 percent, as expected.

Separately, the Bank of England also kept its benchmark interest rate unchanged on Thursday, at 0.5 percent, amid worries that the British economy could fall back into a recession for the third time in five years. The pound has been falling against the euro and the dollar this year, pressured by investor concerns that the British economy may not manage to recover anytime soon.

Mr. Draghi, during the news conference, was careful to avoid any explicit threat to take action to push down the euro, or to criticize any other countries. He said the euro’s current value was not far from its historical norm. But he noted that economic policy by other countries, none of which he identified, could affect exchange rates.

“Draghi’s biggest challenge was to show his magic skills of verbal interventions and to talk down the euro exchange rate,” Carsten Brzeski, an analyst at ING Bank, wrote in a note to clients. “He succeeded.”

Having traded at nearly $1.36 to the dollar earlier on Thursday, the euro dropped to below $1.34 after Mr. Draghi’s comments. In July it was trading just above $1.21.

Its record high of just below $1.60 was reached in April 2008, when the U.S. banking crisis was gathering steam.

Recent data have supported the E.C.B.’s view that the euro zone will emerge from recession this year, a view Mr. Draghi repeated Thursday. German industrial production rose 0.3 percent in December from November, according to a report Thursday, reversing a decline in the previous month and signaling a pickup in Germany, which has the largest euro zone economy.

But the recovery is threatened by the rising value of the euro, which could hurt European exports by making them more expensive for foreign buyers. In recent weeks, the euro has risen substantially against the dollar, to its highest levels in a year.

Few analysts had expected the E.C.B. to shift its monetary policy Thursday. Some predict that the benchmark rate could stay at its present level for an extended period as the euro zone slowly returns to growth.

But Mr. Draghi also emphasized Thursday that inflation was headed below the E.C.B.’s target of about 2 percent. The lack of price pressure would allow the E.C.B. space to cut rates if it chose.

Mr. Draghi argued that the appreciation of the euro “is a sign of return of confidence.” Some analysts said it could take a bigger increase in the currency’s value before the E.C.B. would consider taking action, like a cut in the benchmark interest rate.

A stronger euro means that products ranging from cars to wine become more expensive abroad, putting European producers at a disadvantage against foreign competitors. But there are also positive effects. Imports, particularly oil, become less expensive for Europeans, which helps stimulate the economy.

“The main factor behind the euro strength is the easing of the sovereign debt crisis, which is clearly positive for the euro zone growth,” Jörg Krämer, chief economist at Commerzbank, wrote in a note. “The E.C.B. is likely to tolerate further euro appreciation and is quite unlikely to cut rates again.”

During the news conference, Mr. Draghi deflected persistent questioning about a deal that the Irish central bank announced Thursday. It said that the E.C.B. had agreed to stretch out repayments for the 2009 bailout of Anglo Irish Bank to 40 years, instead of the 10 years previously scheduled.

The Irish Parliament approved legislation early Thursday to liquidate Anglo Irish Bank, after negotiating with the E.C.B. to swap the so-called promissory notes used to bail out the Irish lender for long-term government bonds.

Mr. Draghi said the E.C.B.’s Governing Council merely “took note” of the Irish action. But he declined to provide any details.

He may have wanted to avoid any impression that the central bank was giving a financial break to the Irish government. The E.C.B.’s charter prohibits it from directly financing euro zone governments.

Mr. Draghi did, however, applaud efforts by the Irish government to restore growth and get government finances under control. “All in all the outlook is very positive,” he said.

He also strenuously defended himself against criticism that, in his previous job as governor of the Bank of Italy, he had not done enough to prevent problems at Monte dei Paschi di Siena, which has required a €3.9 billion bailout by the Italian government.

Mr. Draghi was governor of the Italian central bank, responsible for bank supervision, during the period when Monte dei Paschi was getting in trouble several years ago. The former Prime Minister of Italy, Silvio Berlusconi, with whom Mr. Draghi has tense relations, has tried to capitalize on the issue during the current Italian election campaign.

Mr. Draghi said the Bank of Italy had done all it could, and noted that it lacked the power to remove managers at Monte dei Paschi or to pursue criminal wrongdoing. “You should certainly discount much of what you hear and read as part of the regular noise that elections produce,” Mr. Draghi said.

Julia Werdigier and Mark Scott contributed reporting from London.

Article source: http://www.nytimes.com/2013/02/08/business/global/european-central-bank-leaves-interest-rate-unchanged.html?partner=rss&emc=rss

DealBook: Despite Calm, Draghi Raises Economic Concerns

Mario Draghi, the president of the European Central Bank, at the World Economic Forum in the Swiss resort of Davos on Friday.Pascal Lauener/ReutersMario Draghi, the president of the European Central Bank, at the World Economic Forum in the Swiss resort of Davos on Friday.

DAVOS, Switzerland — Calling 2012 the year the euro was renewed, the president of the European Central Bank expressed concern that calm on financial markets had not yet led to economic growth and better lives for European citizens.

Mario Draghi, the central bank president and the person who can probably take more credit than anyone for the relative tranquility that greets visitors to the World Economic Forum this year, used an appearance here to take stock of the state of the euro zone.

Mr. Draghi said that central bank measures last year had prevented a banking crisis. And he also praised government leaders for steps they took to strengthen the currency union, for example agreeing to put the central bank in charge of supervising banks — a change that will be phased in over the next year.

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And the net effect of those moves? ‘‘To say the least, the jury is still out,’’ Mr. Draghi said. ‘‘We haven’t seen an equal momentum on the real side of the economy. That’s where we have to do some more.’’

The euro zone economy has stabilized at a very low level, Mr. Draghi said, and should begin to recover in the second half of 2013.

Data released Friday supported the thesis of a gradual recovery. The Ifo business climate index, a closely watched indicator of business confidence in Germany, rose more than expected. The survey suggested that the euro zone’s largest economy is growing again after a contraction at the end of 2012.

What’s more, the central bank said Friday that more euro zone banks than expected had chosen to make early repayment of three-year central bank loans they took out a year ago. The volume of early repayment is seen as a sign that at least some banks are healthier than they were, and able to raise money on their own. The central bank said 278 banks would pay back 137 billion euros, of a total of 489 billion euros they borrowed a year ago at exceedingly low interest rates.

Banks could borrow the money at the central bank’s benchmark interest rate, currently 0.75 percent. But some may have felt that there was a stigma attached. Even though the European Central Bank does not disclose borrowers, banks may have been concerned about appearing weak in the eyes of the central bank. In addition, banks needed to post bonds or other assets as collateral, and some may now prefer to deploy the assets elsewhere.

Looking ahead, Mr. Draghi described 2013 as a year of implementation, when the European Central Bank and governments would begin carrying out decisions they made last year.

The central bank would begin assuming authority over banks, he said, and governments would carry out changes intended to improve their ability to respond to crises and police each other’s spending. As central supervisor, the central bank is expected to be more willing than national regulators to force sick banks to confront their problems.

Mr. Draghi defended the central bank’s position that euro zone governments must continue to work to get spending under control. Austerity — a word Mr. Draghi said he did not like — has been a de facto condition for measures the central bank has taken to contain the crisis and give governments space for economic reforms.

‘‘Fiscal consolidation is unavoidable,’’ Mr. Draghi said during onstage questioning by John Lipsky, a former first deputy managing director of the International Monetary Fund. ‘‘There can’t be any sustainable growth, any sustainable equity achieved through an endless creation of debt.’’

But Mr. Draghi conceded that budget cutting could push countries into recession, and he said governments should cut spending on operations rather than curtailing outlays for infrastructure projects like bridges and roads.

Asked by Mr. Lipsky whether the central bank would follow the Federal Reserve in setting benchmarks for unemployment that would prompt the central bank to lower rates or take other action, Mr. Draghi said no.

But, in what could signal a subtle shift in the central bank’s thinking, Mr. Draghi suggested that the bank can pursue economic growth as part of its prime mandate to defend price stability.

‘‘We have given plenty of evidence we can do so within the existing framework,’’ Mr. Draghi said.

Article source: http://dealbook.nytimes.com/2013/01/25/despite-calm-draghi-raises-economic-concerns/?partner=rss&emc=rss

DealBook: In Euro Zone, Signs of Progress and Fears of Complacency

Mario Draghi, the president of the European Central Bank, with the German chancellor, Angela Merkel, at an E.U. summit meeting in Brussels in June.Francois Lenoir/ReutersMario Draghi, the president of the European Central Bank, with the German chancellor, Angela Merkel, at a European Union summit meeting in Brussels in June.

PARIS – This may be the year that Europe stops being the ticking time bomb of the global economy.

Ireland is on track to leave international bailout limbo by summer. Talk of Greece leaving the euro is off the table. And financial speculators have generally stopped betting the euro zone will blow up.

But even as the sense of emergency fades, Europe is potentially facing a starker problem.

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For three years, Chancellor Angela Merkel of Germany and a phalanx of policy makers have been working to shore up the euro’s foundations to prevent the currency union from unraveling. As they gather with academics, executives and various experts this week at the World Economic Forum, which opens Wednesday in Davos, Switzerland, the biggest concern is that leaders might become less vigilant now that the heat is off, ushering in a raft of new troubles that could dog the euro for years to come.

“The risk is that complacency takes hold because there is no more urgency in the crisis, and that everything that has been done up until now will be deemed sufficient,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. If that happens, he warned, “Europe will turn into the next Japan, and become a permanently depressed or stagnating economic area.”

Ms. Merkel might be forgiven for feeling a sense of vindication. Her deliberate approach to crisis management and refusal to get too far ahead of German public opinion has often frustrated her euro zone peers and foreign allies. And yet, the strategy seems to have worked — so far, at least. Ms. Merkel, who is to speak at Davos on Thursday, and other European leaders have generally done just enough to contain the crisis without alienating taxpayers.

Much of the credit for the current calm in Europe goes to Mario Draghi, the president of the European Central Bank. He appeased financial markets with his promise last summer to do whatever it took to preserve the euro, including buying the government bonds of Spain if necessary to keep a lid on the country’s borrowing costs.

The effect of Mr. Draghi’s promise has been evident: financial markets have stopped driving the borrowing costs of Spain and Italy toward the danger levels that led Ireland, Greece and Portugal to reach for international financial lifelines. Today, few people fear that Europe’s southern countries will break away from the euro union.

Other dire prospects, like Germany and other Northern European countries fleeing the euro union to avoid getting caught in a quagmire, have also dropped off the watch list. If anything, the focus of anxiety is the fiscal situation in the United States, where gridlock in Washington has become just as debilitating for the country’s finances as the euro policy paralysis was for European politicians.

“Some European policy makers who visited the United States recently were delighted to see that because of the fiscal cliff, Europe wasn’t on every channel,” said Kenneth S. Rogoff, a professor of economics at Harvard University. “There is an ecstasy over the fact that they won’t blow apart tomorrow.”

Still, Mr. Rogoff added, Europe must revive economic growth to fully address its problems. “And even if they do, that’s not a long-term solution,” he said. “They need to integrate more fully, or they will fall apart.”

Europe’s political leaders have taken important steps to improve spending discipline among euro members, to provide a financial backstop for troubled euro zone countries and to consolidate supervision of banks. Despite many imperfections, the measures seem to have been enough to convince investors that officials are slowly constructing a more resilient currency union.

“European countries have shown their resolve in making the euro a success and reaffirmed the deep political commitment to work together toward a stronger union,” Vítor Constâncio, the vice president of the European Central Bank, told an audience in Beijing on Jan. 12.

But leaders have yet to address some serious flaws in the structure of the euro zone. For example, they have not solved the problem of how to wind down terminally ill banks without sticking taxpayers with the bill. And they are far away from a deposit insurance fund for Europe, which means the risk of bank runs remains.

“In order to define a turning point, you need a lot of factors besides the stabilization of financial markets,” Mr. Draghi said this month.

But coming events could undermine confidence. Germany will hold national elections in September, which could make Ms. Merkel even more cautious than usual and stall euro zone decision making. Already, her main rivals pulled off an upset in regional elections this weekend in Lower Saxony.

Italian elections are also looming. Mario Monti, the prime minister who has restored Italy’s international credibility and is to speak at Davos on Wednesday, faces a public that is grumpy about a rollback of job protections and other policy overhauls. Silvio Berlusconi, a former Italian prime minister who presided over years of economic standstill, is attempting a populist comeback.

In France, President François Hollande’s pledge to bring the deficit down to 3 percent of gross domestic product this year to adhere to the rules governing euro membership may be challenged if France’s military engagement in Mali and the surrounding region turns into a drawn-out affair.

Across the channel, Prime Minister David Cameron of Britain, who is scheduled to speak at Davos on Thursday morning, has sounded warnings that the country might leave the European Union if changes in its administration are not made. “The danger is that Europe will fail and that the British people will drift toward the exit,” according to prepared text of a speech Mr. Cameron postponed delivering last week because of developments in the hostage crisis in Algeria.

In the meantime, the severe effects of prolonged austerity in several European countries are leaving deep social scars. Tax increases and steep spending cuts have ground many European citizens deeper than ever into hardship, prompting millions to demonstrate in Greece, Italy, Portugal and Spain. Recessionary economies in those countries are expected to get worse before they improve.

In Greece, where austerity has hit the hardest, people are burning trash and wood this winter for lack of money to pay electricity bills, and the government’s efforts to enact structural overhauls needed to turn the economy around and attract foreign investors continue to lag.

And then there is Germany, which itself is being tugged into a slowdown as its cash-poor southern neighbors continue to refrain from buying Audis and other high-priced German goods.

Unemployment in the euro zone continues to climb: the jobless rate in the 17 countries of the bloc hit a record 11.8 percent in November. Youth unemployment has surpassed 50 percent in Spain and Greece, a stratosphere of despair. Thousands of bright young people continue to flee Greece, Ireland, Spain and other countries every month for the booming economies of Australia and Canada.

Portuguese workers are even going to Africa in search of a better future, as the middle class there grows along with improving economic conditions on the southern part of the African continent.

Yet painful adjustments are starting to bear some fruit. Labor costs have come down in countries including Spain and Portugal, helping make their work forces more competitive within the region. In Spain, for instance, where unit labor costs have fallen 4 percent since the onset of the financial crisis in 2008, the labor market is now so alluring that Ford, Renault and Volkswagen have announced plans to expand production there.

In addition, the alarming flight of deposits from banks in Spain has come to a stop.

The euro zone’s problems have proven an opportunity for some countries to remove structural impediments to growth. In France, where Mr. Hollande has promised to make the economy more competitive, labor unions have agreed to a deal to overhaul swaths of the notoriously rigid labor market.

The deal would tame some of the French labor code’s most confounding restrictions, including lengthy hiring and firing procedures and outsize business taxes, as the country tries to lift its competitiveness, curb unemployment and improve the budget.

“Is the worst over? Probably yes,” analysts at Barclays Capital wrote in a recent note to clients.

That will be especially true if leaders and businesses persist in using the crisis as a chance to renew European competitiveness.

While some countries may have made enough economic overhauls to enjoy substantial growth, once the crisis is past, said Nicolas Véron, a senior fellow at Bruegel, a research institute in Brussels, “there are a lot of nuts still to crack.”

Jack Ewing reported from Frankfurt.

Article source: http://dealbook.nytimes.com/2013/01/21/in-euro-zone-signs-of-progress-and-fears-of-complacency/?partner=rss&emc=rss

E.U. Leaders Hail Accord on Banking Supervision

The deal’s importance “cannot be appreciated highly enough,” Chancellor Angela Merkel told the Bundestag, the lower house of the German Parliament.

“Europe and the euro area are providing proof that they are able to meet the challenges they face,” François Hollande, the French president, said in a statement.

In another sign of renewed efforts to shore up the euro, finance ministers and international officials approved the release of further aid to Greece, including long-delayed payments and other aid totaling nearly €50 billion, or $65 billion, that is crucial for the government to avoid defaulting on its debts.

“The sacrifices of the Greek people have not been in vain,” Prime Minister Antonis Samaras said, referring to stringent austerity measures Greece had adopted in order to obtain the aid.

“Today is not only a new day for Greece, it is indeed a new day for Europe,” Mr. Samaras said in Brussels ahead of a two-day summit meeting of European leaders.

The agreement on new banking supervision would put between 100 and 200 major banks under the direct oversight of the European Central Bank, leaving thousands of smaller institutions to be overseen primarily by national regulators.

But E.U. finance ministers, who reached a deal after meeting for 14 hours late Wednesday and early Thursday, insisted that the E.C.B. would be able to take over supervision of any bank in the euro area at any time.

Mario Draghi, the president of the central bank, said the agreement “marks an important step towards a stable economic and monetary union, and toward further European integration.”

Mr. Draghi added that governments and the European Commission still had to work on the details of the supervision mechanism, which is to be fully operational by March 2014.

The system must also be approved by the European Parliament and national legislatures before it goes into effect.

The new system is intended to strengthen oversight of a sector that, under the supervision of national regulators, failed to prevent banks from accumulating so much debt that they put at risk the finances of euro zone states including Ireland and Spain, in turn threatening the future of the currency.

The agreement on banking supervision was expected to act as a springboard for European leaders to discuss later on Thursday steps leading to a broader banking union. Such measures would include a unified system, and perhaps shared resources, to ensure failing banks are closed in an orderly fashion. This would be followed, in time, by measures intended to reinforce economic and monetary union, including, possibly, the creation of a fund that could be used to shore up the economies of vulnerable members of the euro zone.

To win France’s agreement on the new banking supervisor, finance ministers agreed that only banks holding more than €30 billion in assets, or assets greater than 20 percent of their country’s gross domestic product, would be directly regulated by the E.C.B. Previously, France and the European Commission had asked that all 6,000 banks in the euro area should be closely regulated by the central bank.

Germany, facing pressure from a powerful domestic banking lobby trying to shield many small savings banks from closer scrutiny, had sought a reduced remit for the E.C.B. In the end, Germany agreed to allow the central bank to step in and take over supervision of any bank in the euro area at its discretion.

The Germans also had concerns that the central bank could be tempted to alter its decisions on monetary policy to make its supervisory job easier. As a compromise, Germany agreed that member states would be given greater scope than originally foreseen to challenge central bank decisions.

“We succeeded in securing Germany’s key demands,” Ms. Merkel said in Berlin. There would be a “clear separation” between the central bank’s responsibility for monetary policy and for oversight, she added.

Britain, which is not a member of the euro zone, had sought assurances that the new banking supervisor would not have influence over British banks operating abroad or banks operating in the City of London.

Britain agreed to a formula that should free it and other E.U. members outside the euro zone from most, but probably not all, rule-making by the E.C.B. These countries will also be able to challenge E.C.B. decisions on cross-border banking.

“The safeguards we have secured protect Britain’s interests and the integrity of the European single market,” said the chancellor of the Exchequer, George Osborne. “It shows that when Britain takes a tough stance but based on strong principle, Britain can win the argument and protect our interests.”

For countries including Spain and Ireland, the supervisor is a prerequisite for a new European bailout fund to provide aid directly to their troubled banks. That would allow those governments to avoid weighing down their national balance sheets with yet more debt..

But any direct recapitalization of banks is only likely to go ahead during 2014, once the supervisor is fully operating, and well after a German general election in October 2013. Still to be clarified is whether the aid could go to banks that have already run into trouble, or whether it would be used only to help lenders that falter in the future.

Providing direct support to banks is a sensitive matter for German taxpayers, who have grown weary of footing most of the bill for the euro zone’s bailouts.

Melissa Eddy contributed reporting from Berlin and Niki Kitsantonis from Athens.

Article source: http://www.nytimes.com/2012/12/14/business/global/eu-leaders-hail-accord-on-banking-supervision.html?partner=rss&emc=rss