Paul Krugman rails at the European Central Bank for failing to cut interest rates.
Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move.
And that doesn’t even take into account the growing risk of a euro crackup. For years Spain and other troubled European nations have been told that they can only recover through a combination of fiscal austerity and “internal devaluation,” which basically means cutting wages. It’s now completely clear that this strategy can’t work unless there is strong growth and, yes, a moderate amount of inflation in the European “core,” mainly Germany — which supplies an extra reason to keep interest rates low and print lots of money. But the central bank won’t move.
Others think it is completely clear that the problems with the Euro are too grave to be solved exclusively with monetary policy. Yet time bought by the ECB simply becomes time squandered by Europe's 'leaders', who would welcome any excuse, such as a rate cut, to evaluate the situation and defer any unpopular decision for a few more months.
Over to the WSJ:
“The ECB looks determined to keep maximum pressure on euro-zone politicians,” [Brussels-based ING economist Carsten Brzeski] Brzeski says.
“More generally on the euro-zone crisis, Draghi just repeated last month’s inconvenient truth that there was no silver bullet for the crisis,” Brzeski says. “Today’s press conference was a clear signal that the ECB is tired of pulling the chestnuts out of the fire for euro-zone politicians.”
Excerpts from Draghi's comments are here.