Euro hits two-year low despite ECB tensions
November 6, 2014, 11:58 pm

French President Francois Hollande, left, meets with Draghi during a policy meeting. France is dangerously close to recession and seen its economy retract in previous quarters [Xinhua]

Over the past two weeks, the euro has fallen 2.6 per cent; it has fallen nearly 11 per cent since January 2014.

The slide came amid reports of tension within the European Central Bank (ECB) with some blaming the leadership style of its head Mario Draghi for the slow response to the 18-nation eurozone teetering on recession.

But on Thursday, Draghi appeared to have gained significant support within the ECB as he pledged that the bank would continue to plug stimulus initiatives to resuscitate the eurozone economy.

He said that the ECB was committed to “ensuring the timely preparation of further measures to be implemented if needed”.

“The Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate,” he said.

However, he stopped short of saying whether the ECB would take on a more aggressive stimulus plan, one that is built on quantitative easing.

In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – Central Banks can resort to quantitative easing by flooding financial institutions with capital.

In 2009, the US Federal Reserve launched an $85-billion bond-buyback program to generate stimulus in the economy following the sub-prime mortgage crisis which led the world into recession.

But with the US economy appearing to have regained its pre-2008 strength, the Fed ended the bond-buyback scheme last month.

On Thursday, the ECB voted to keep interest rates at 0.05 per cent and maintain current deposit rates to below zero at -0.2 per cent.

This would mean that banks that hold money overnight at the central bank would have to pay for the service; it would be in their benefit to encourage lending.

European analysts, however, say that ECB initiatives this summer have failed to increase the inflation rate – a critical marker of an economy’s health.

Recent data has the average inflation rate among the 18-nation eurozone at 0.5 per cent in the period up to the end of May 2014, and the ECB says that low inflation – or deflation – can postpone growth as consumers wait for bargain prices for goods and services.

Eventually, this leads to inadvertent stagnation.

The ECB has maintained that a two per cent inflation rate is ideal for eurozone growth.

Earlier, the International Monetary Fund said it was concerned that European economies were not moving out of recession quickly enough.

Although the euro’s decline in recent days offers some reprieve, some analysts believe that the strong euro performance against the dollar may also be a cause for concern.

Draghi himself has previously admitted that “the strengthening of the euro in the context of low inflation and still low levels of economic activity, is a cause for serious concern in the view of the [ECB’s] Governing Council”.

Source: Agencies