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Euro plummets after ECB warns currency zone may need more support

The risks surrounding the economic outlook for the euro area continue to be on the downside. Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions.
Mario Draghi

Powered by Guardian.co.ukThis article titled “Euro plummets after ECB warns currency zone may need more support” was written by Phillip Inman, economics correspondent, for The Guardian on Thursday 9th January 2014 18.17 UTC

The European Central Bank sent the euro tumbling on world markets after it warned that the 18-member currency zone may need further support to prevent a Japanese-style period of stagnation.

The ECB president, Mario Draghi, said persistently high unemployment, falling inflation and difficult lending conditions were harming the recovery, and the ECB stood ready to use all the tools available to maintain confidence and growth.

Speaking as the central bank kept interest rates at 0.25% on Thursday, he said the ECB would consider printing money as well as other measures should there be a further deterioration in the availability of credit or another drop in inflation.

"The governing council strongly emphasises that it will maintain an accommodative stance of monetary policy for as long as necessary," he said.

The warning came as the UK economy appeared to be moving strongly in the opposite direction and concerns that it will soon overheat.

The Bank of England's monetary policy committee kept base interest rates steady at 0.5% at its January meeting but an increasing number of analysts called on the Bank's governor, Mark Carney, to prepare for a rate rise as early as the summer.

Carney has signalled his intention to keep rates at ultra-low levels until the recovery is assured, which Threadneedle Street believes will be mid-2015 at the earliest.

But the unexpectedly sharp rise in gross domestic product over the last year and the speed with which employers are adding jobs has convinced many economists that rates should rise earlier.

Recruitment agencies reported that job creation surged in December. Pay rates for new staff also rose at the fastest pace for six years, according to a survey by Markit for the Recruitment & Employment Confederation and KPMG.

The survey data suggested that unemployment will continue to drop sharply, possibly falling through the Bank's 7% unemployment rate threshold in early 2014, and that a return to real wages growth is in sight this year.

Chris Williamson, Markit's chief European economist, said the Bank's forecast for unemployment to fall to 7% late this year already looked out of date. Wage rises, however, remained well below the 2.1% inflation rate, rising at 0.9% a year in November.

Britain's booming economy still remains 2% below its peak and manufacturing, which the government has promoted and is which growing strongly, is 9% below levels in 2008. But over the last year it has outstripped rivals to be one of the fastest growing economies in the developed world.

Draghi said a Japanese-style period of stagnation that brings with it falling prices and a decline in consumer demand has yet to arrive, but the ECB must be ready to play a part in boosting confidence in the financial system and broader eurozone economy.

"Right now, we don't see deflation," he said. "By and large we don't see a deflation in the Japanese sense of the 1990s."

France has become a major worry for eurozone policymakers after figures for December appeared to show it slipping back into recession.

Greece's industrial slump has also deepened and unemployment reached a record high, according to data yesterday, highlighting the ravages of a six-year recession even as the debt-laden economy shows tentative signs of a recovery elsewhere.

The jobless rate rose slightly to a record 27.8% in October while industrial output contracted in November for a fifth consecutive month, by 6.1%.

Nevertheless, Draghi said confidence was gradually returning to the eurozone economy and the central bank's very accommodative monetary policy stance was finally finding its way into the real economy.

He stopped short of saying the eurozone crisis is over. "The recovery is there but it's weak, it's modest and as I said many times, it's fragile, meaning that there are several risks, from financial to economic to geopolitical to political risks, that could undermine easily this recovery," he said.

guardian.co.uk © Guardian News & Media Limited 2010

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About Carl William Brown

I'm Carl William Brown a holistic teacher, a webmaster, a trader, and a writer of aphorisms and essays. I have written more than 9,000 original quotations and at present I'm also working at my only novel, Fort Attack, which is also a wide and open blog project. At the moment I'm teaching English in a secondary school, but up to now I have done a lot of other things as well, both in business, educational, sport and social fields. Some years ago, in 1997 following the examples of the Rotary or the Lyons Clubs I founded the Daimon Club Organization to promote every sort of activities, creativity, art, literature, new technologies, informatics, business and marketing, public health and education and to meet new friends with these kind of interests.
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