Over to you, Merkel

Tim Wallace
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Europe's political leaders must act now to restore confidence and stop their ravaged economies from collapsing any further, European Central Bank (ECB) boss Mario Draghi insisted yesterday as he again refused to cut interest rates.

Draghi stressed the Eurozone’s problems could not be solved by monetary policy, and that politicians must stop hesitating and take necessary action to clean up troubled banks and restore competitiveness to failing economies.

“It would not be right for monetary policy to fill in for other institutions’ lack of action,” he said, as he announced most policymakers had decided against cutting interest rates.

Markets had high hopes for more support from the ECB, but rose despite the disappointment thanks to hints of further QE from the Federal Reserve.

Atlanta Fed boss Dennis Lockhart said more stimulus would be required if the economy slowed much further.

“Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered,” he said, just a week after first quarter GDP growth was revised down.

European stocks rose strongly, with the Euro Stoxx 50 up 2.42 per cent and the FTSE 100 up 2.36 per cent. In the US the Dow closed up 2.37 per cent in a second day of gains – and the S&P 500 enjoyed its best day of the year.

Draghi used his speech yesterday to explain that the ECB will continue to supply banks with unlimited liquidity until at least January next year, but questioned the benefits of another three-year long-term refinancing operation (LTRO). The last LTRO relieved pressure on government bonds, but was only meant to offer breathing space, not to solve the crisis alone.

Pointing to “increased downside risks” from weak growth and low confidence, Draghi said: “It is of crucial importance to continue with the efforts to restore sound fiscal positions and to regain competitiveness.”

That places the ball firmly in the court of political leaders, who are holding a summit later this month to again try to end the crisis decisively.

Spanish PM Mariano Rajoy has been particularly vocal in explaining the depth of the crisis, pushing for jointly guaranteed eurobonds after his treasury minister warned the country was having difficulty borrowing on the bond markets. That will be put to the test today as the government tries to raise €1bn (£811m) to €2bn in 10-year bonds. German Chancellor Angela Merkel has been firmly refusing to back the joint bonds that would cut borrowing costs for troubled governments like Spain, arguing that economic reforms should address the underlying problems, rather than rely on support from German taxpayers.

The Fed’s Beige Book summary of economic conditions, meanwhile, reported “moderate” growth across the country, with construction picking up, demand for loans rising and hiring slightly rising.