Eurozone interest rates unchanged, despite Germany’s economic problems, January 2003

At a press conference on 9 January 2003 the President of the European Central Bank, Wim Duisenberg, announced that the ECB would be leaving its key interest rates for the 12-member eurozone unchanged:

"Overall, we consider that the outlook for price stability in the medium term has not changed since our decision of 5 December to reduce the key ECB interest rates. We judge the current monetary policy stance appropriate to maintain a favourable outlook for price stability in the medium term."

The decision was taken at a meeting of the Governing Council of the ECB, which was also attended by the Greek President of the ECOFIN Council and by the Commissioner for Economic and Financial Affairs, Pedro Solbes.

The ECB rates are:

• main refinancing operations: 2.75%
• marginal lending facility: 3.75%
• deposit facility: 1.75%

The decision came as no surprise: the previous month had seen the first cut for more than a year (0.5%) and the ECB was expected to give that initiative time to take effect. The ECB has maintained high interest rates in an attempt to combat "persistently high" inflation (BBC) in a faltering European economy. Pressure is building, however, for more cuts.

Although the EU is not in recession, the BBC says Germany is "teetering on the brink." The German economy - the Union's largest - is in poor shape, with the lowest growth of any eurozone member. The German government has been criticised by the European Commission for running an excessive budget deficit, thereby contravening the rules of the Stability and Growth Pact. The overspend has been blamed in part on increased public spending - a state of affairs which it has been claimed would only be exacerbated if a public sector workers' pay claim of 3% was met. Unions had threatened to strike, but an agreement reached late on 9 January seems to have averted that action. , but could put pressure on local authorities, which have claimed they don't have sufficient funds to meet workers' demands.

As if all that weren't enough, unemployment has just hit a four-year high in Germany, with 4.225 million people (10.1% of the working population) jobless. Poor economic growth is blamed partly on slow domestic demand; there are calls for tax cuts and lower interest rates to stimulate consumer spending.

The Financial Times reported that the Deutsche Institut fur Wirtschaftsforschung (DIW) is forecasting low growth for 2003 and into 2004. The DIW's Chief Economist has called for the EU to follow the United States in trying to spend its way out of recession - an approach specifically ruled out by Commissioner Pedro Solbes when announcing the Commission's assessment of six Stability/Convergence Programmes on 8 January:

"Past experience has shown clearly that we cannot spend our way out of the slow down [sic] here in Europe. The short-term benefits of an expansionary fiscal policy would be outweighed by the medium term costs to our economies."

The DIW believes that further cuts in eurozone rates are needed, and suggests - reports the FT - "that further cut[s] by 0.5 percentage points to 2.25 per cent would be appropriate for Germany."

Links:

European Central Bank:
	09.01.03:	ECB press conference: Introductory statement
	09.01.03:	Monetary policy decisions
BBC News Online:
	09.01.03:	German joblessness nears four million
	09.01.03:	Eurozone rates left unchanged
	09.01.03:	Pay deal averts German strike threat
European Sources Online: Financial Times:
	09.01.03:	ECB keeps rates on hold despite Iraq fears

Eric Davies
Researcher,
Compiled: Friday, 10 January 2003

At a press conference on 9 January 2003 the President of the European Central Bank, Wim Duisenberg, announced that the ECB would be leaving its key interest rates for the 12-member eurozone unchanged.