European Central Bank: Recovery is strengthening

AP News
Posted: Mar 05, 2015 12:44 PM
European Central Bank: Recovery is strengthening

NICOSIA, Cyprus (AP) — The European Central Bank will unleash its 1.1 trillion euro ($1.2 trillion) stimulus program on Monday — and says the prospect is already boosting the eurozone economy.

Mario Draghi, the bank's president, said consumers and businesses in the 19 euro countries are benefiting not only from cheaper energy prices but also from optimism over the coming stimulus.

He cited "a significant number of positive effects" from the January announcement of the massive stimulus plan, on top of previous efforts to loosen credit to businesses. Borrowing conditions are already considerably easier, he noted.

"Looking ahead, we expect the economic recovery to broaden and strengthen," Draghi told reporters after the bank kept its key interest rate on hold at its monthly meeting Thursday. The comments helped push up European stocks and sent the euro to a 12-year low.

The ECB raised its eurozone growth forecast for this year to 1.5 percent from 1.0 percent amid signs credit is flowing more easily. Draghi cautioned that some member states' failure to make pro-growth reforms would dampen the recovery.

He said the ECB would on Monday start buying 60 billion euros ($67 billion) a month in government and corporate bonds. The purchases with newly printed money aim to drive down market interest rates, stimulating lending and growth and raising the rate of inflation, which is dangerously low at minus 0.3 percent.

The currency union still faces serious risks as it tries to recover from a crisis over government debt in countries such as Greece, Portugal, Ireland, Spain and Italy. Growth is returning, overcoming the drag from government spending restraint and higher taxes. But progress is lagging on reforms by member countries such as France to cut regulations on hiring and firing and reduce red tape that discourages business growth.

And Greece is still struggling to avoid a default on its debts that could force it to leave the euro. A Greek departure could undermine belief in the solidity of the currency union and hurt governments' ability to borrow affordably.

"It is clear that the ongoing risk of a Greek exit from the eurozone, and the financial fallout in other vulnerable economies, continues to pose a risk to confidence in the eurozone and firms' willingness to invest and create jobs," said Tom Rogers, senior economic adviser to the EY eurozone forecast.

The currency union's economy grew 0.3 percent in the last three months of 2014 from the quarter before. Unemployment has started to fall but remains high at 11.2 percent.

In an effort to bolster confidence in the recovery, the ECB said it will keep buying bonds until September next year, and in any case until inflation rises from levels considered dangerously low.

Economists say hopes for the stimulus program are one reason the economy is showing signs of life. Lower oil prices are another, and so is a weaker euro, which helps exporters.

The euro traded at a 12-year low against the dollar at $1.1000 after Draghi's comments.

Draghi underlined the central bank's commitment to support Greece, but within the ECB's rules. Greece is trying to find a way to win more bailout loans from the other eurozone countries, and has four months to submit a convincing plan to turn its economy and finances around.

Draghi said the ECB "stood ready" to once again permit Greek banks to use junk-rated Greek government bonds as collateral to get credit from the ECB. That would happen as soon as the bank assesses that Greece is likely to successfully complete a creditor review of its progress.

Inability to use the bonds as collateral has forced the banks to rely on more expensive emergency credit from the Greek central bank.

The ECB held its meeting in Nicosia, the capital of the Mediterranean island state of Cyprus, one of two meetings per year it holds away from its headquarters in Frankfurt, Germany.


McHugh reported from Frankfurt, Germany. Pan Pylas in London contributed to this report.