European Central Bank Refuses to Trim Rates

European Central Bank governors refused Thursday to lower interest rates for the 12-nation euro zone, ignoring appeals from industry leaders and economists for bold action to avert a global recession in the aftermath of the Sept. 11 terrorist strikes.

Policymakers from the United States and Europe have been pleading for weeks for lower interest rates to boost investment and production, warning that euro zone economies are threatened not only with lower growth but also potential shrinkage.

But at its biweekly meeting, the ECB stuck to its priorities of fighting inflation and debt. By maintaining its benchmark interest rate of 3.75%, compared with 2.5% in the United States, the bank backed the position of Chancellor Gerhard Schroeder that the German economy needs no action to avert recession.

That view clashes dramatically with the opinions voiced earlier this week by directors of the six leading institutes that monitor the German economy, which accounts for a full third of the euro zone’s gross domestic product. In their fall economic forecast, they called for aggressive rate cuts to match confidence-boosting measures undertaken across the Atlantic.

The dollar has been rising against the euro in the wake of the terror strikes mainly because currency traders are responding to the bolder U.S. government moves to stimulate the economy.

ECB rates have been lowered three times this year, but only once since the terrorist attacks--a half-a-percentage-point cut Sept. 17. The U.S. Federal Reserve has cut rates nine times and the Bank of England six times.

The chief economist for one of the six think tanks advising the government, Gustav Horn of the German Institute for Economic Research, describes the ECB and government interest rate policy as a roadblock to recovery.

“We’ve long been of the opinion that interest rates need to be drastically reduced, at least down to the levels created in response to the Asian economic crisis,” Horn said, noting that intervention in the 1997 slump brought borrowing rates down to 2.5% in Asia.

In their report, the economists also suggested a second phase of tax relief set for 2003 be moved up a year to give consumers $6 billion more to spend in 2002.

But Schroeder and Finance Minister Hans Eichel say Germany can tough out the current woes without major changes. They note that the first stage of a tax reform aimed at bringing top personal income tax rates down from 54% to 45% by the end of the decade is pumping an extra $20 billion into the economy this year. They warn that expansionary tactics threaten to increase inflation and national debt and violate fundamental principles of the single-currency project.

“We are not threatened by recession,” Schroeder told a conference in Leipzig, Germany, clearly dismissing the economic gurus’ advice ahead of the ECB meeting.

“We are going through an economic slowdown, not a recession,” Eichel said after the economists’ report was released Tuesday, adding that Germany must abide by the strict debt and inflation limits euro countries imposed on themselves under the 1996 Stability and Growth Pact.

Horn and others say the stability regime is already dead and its guidelines need to be reoriented. Inflation now has exceeded the pact’s established limit of 2% for 16 months, and business confidence in Germany tumbled to a 30-year low last month.

The fall economic forecast sharply revises downward the 2001 growth rates for Germany, the euro zone and the United States, noting the Sept. 11 blows came during a phase of “pronounced cyclical weakness.”

German growth this year had been pegged at about 2% until summer, when rising unemployment and plummeting business confidence pushed expectations down to as low as 1%. Now the outlook for Germany, the world’s third-largest economy after the United States and Japan, is 0.7% growth this year and only 1.3% in 2002, compared with 2% to 3% forecast earlier.

The German economists’ 2001 predictions for the United States now are for 0.9% growth, down from 4.1% last year. But they see a U.S. recovery in the spring that will lead to 1.7% growth by the end of 2002.

U.S. politicians, economists and business leaders meeting here this week for a brainstorming session on transatlantic leadership seemed far less confident.

“I’m encouraged by these statistics, but it’s not what we’re seeing,” Kentucky Gov. Paul E. Patton said of the spring turnaround forecast, warning Europeans that the post-terrorism mood in the U.S. has a bearing on the pace and depth of the slowdown.

German investment banker Ernst-Moritz Lipp said reactions to the Sept. 11 attacks are mostly psychological, and urged business and government leaders to act “to turn around pessimistic expectations as soon as possible.”

Many of those searching for a new strategy in the aftermath of Sept. 11 warn of a self-fulfilling prophecy: Consumers and investors fear they are more vulnerable and horde their money, making capital harder to raise and causing a drop in demand, forcing production cuts and layoffs that in turn damage the tax base.

Schroeder has urged his countrymen “not to talk such a risk into existence.”

Some U.S. businessmen agree the risks are psychological and therefore can be defeated with courage and will.

“We’re spending a great deal of time commiserating over a very small group in the world,” Dell Loy Hansen, president of Wasatch Property Management Inc., said of the economic world’s reactions to the terrorist strikes.

“We’re all afraid. We’re afraid to fly, to do business. We’re afraid of our mail and our water,” he said, urging business and political figures to lead by example, taking economic risks and tackling the roots of the terrorism threat, which he and others blamed on the growing imbalance between the world’s haves and have-nots.

“Economic integration, democracy, development of a strong middle class--these are the anchors of the developed world,” said Vermont Gov. Howard Dean, encouraging democratic countries to rethink their relationships with Third World states, where ruling clans or royal families are among the few to benefit from foreign trade and investment.

“This is no time for business as usual,” agreed Juergen Chrobog, Germany’s deputy foreign minister and a former ambassador to the United States.

“We cannot let the terrorists achieve their aim, which was to destroy our way of life.”