New Eurobank Slashes Rates in 11 Countries

Setting the stage for introduction of Europe’s new common currency on Jan. 1, the fledgling European Central Bank undertook its first coordinated monetary action Thursday by slashing interest rates across 11 nations.

The action, aimed at stimulating growth and reducing unemployment, sent prices higher on Europe’s stock markets and provided a glimpse of the clout that the Eurobank will potentially have.

But U.S. and other markets outside Europe were buffeted by bearish news from Brazil and other developments.

The Eurobank move, announced by bank chief Wim Duisenberg in Frankfurt, Germany, sets a common interest rate for the 11-nation alliance that will begin using the same currency, the euro, on Jan. 1.

The 11 countries launching the euro are Austria, Belgium, Ireland, Italy, Finland, France, Germany, Luxembourg, the Netherlands, Spain and Portugal.

Determining a common lending rate has been a sticking point for the euro nations, with key interest rates ranging from 3.2% in Austria to 4% in Italy. After a Tuesday meeting of central bank chiefs within the Eurobank’s governing council, the key lending rate was dropped to 3% in all countries except Italy, where it fell to 3.5%.

A statement from Eurobank headquarters in Frankfurt made clear that the coordinated action was intended to fix a common key lending rate for the 11 countries to use when monetary union becomes a reality in the new year.

The decision taken by the governing council “has to be seen as a de facto decision on the level of interest rates with which the [Eurobank] will begin,” said the statement.

Central bank chiefs from each of the 11 countries who will use the euro and a six-member board headed by Duisenberg comprise the Eurobank’s governing council.

The 11 nations have been gradually narrowing the gap among their interest rates and had been expected to agree on a common level before Jan. 1. But it was not at all certain that the overall direction would be down.

German and French government leaders had been exerting strong pressure on their independent national banks over the last few weeks to cut lending rates to encourage domestic investment and job creation. Unemployment is well over 10% in Germany, the economic powerhouse of the new euro zone, and nearly 11% for the zone as a whole.

German Finance Minister Oskar Lafontaine, who also is head of the Social Democratic Party that governs under new Chancellor Gerhard Schroeder, had been pressuring German Bundesbank chief Hans Tietmeyer to unilaterally drop Germany’s key lending rate since the party took power five weeks ago.

As he boarded a plane at Cologne-Bonn airport en route to the United States and Canada for official visits, Lafontaine described the Eurobank action as welcome and said he was satisfied with the scope of the reduction.

The Assn. of German Bankers also applauded the move as “a contribution toward stabilizing the recently deteriorating economic climate.”

Tietmeyer told reporters the interest rate reductions decided for all euro-zone countries were in response to a worsening economic outlook for the region, not a caving in to the public pressure exerted by Lafontaine.

“It’s not a dramatic step. It wasn’t in response to political pressure,” said Tietmeyer, described by the German media as having saved face with a Europe-wide reduction instead of taking lone action.

The rate cuts agreed upon by the 11 euro-zone countries “could lead to a reduction in the current pessimism and a reduction in financial market turbulence,” Tietmeyer added.

However, the German central bank chief insisted, the Bundesbank remains committed to maintaining a “steady hand” on lending rates. The Bundesbank has long opposed interest rate reductions as a means of stimulating growth for fear that the cuts could fuel inflation.

The U.S. Federal Reserve has dropped its key lending rate three times over the last two months, adding to the pressure on Germany to follow suit. The European move, along with continuing signs of economic slowing in the U.S., increased speculation that the Fed will lower rates a fourth time when its Open Market Committee meets next on Dec. 22.

Financial analysts generally applauded the Eurobank action.

Expectations for economic growth in the 11 euro countries recently have been scaled back because of fallout on the continent from the continuing financial crises in Russia and Asia.

The euro-zone countries had been expected to expand by 3% next year, but Duisenberg now predicts no more than 2.5% growth for the region.