• Talk of ECB action grows as European economy fades
     | August 26,2014
    ap photo

    The new headquarters of the European Central Bank (ECB), building at right is under construction on the waterfront of the River Main in Frankfurt, Germany, Monday. The ECB is supposed to move into the building at the end of 2014.

    FRANKFURT, Germany — Worries about the economy are rippling through Europe.

    Downbeat data have pushed the European Central Bank closer to more drastic action to keep the hesitant recovery from stalling completely.

    Meanwhile, open feuding in the French government about how to break out of economic stagnation saw President Francois Hollande dissolve the cabinet and order Prime Minister Manuel Valls to form a new team.

    Concerns had grown so strong that by Monday investors were willing to bet that the ECB will intervene with new stimulus measures, based on comments late Friday by bank President Mario Draghi. Stocks in Europe rallied.

    Draghi warned that low inflation — a sign of economic weakness — could be getting worse. Draghi also underlined the sense of urgency by telling European governments to make a more coordinated effort to boost growth through tax cuts and a new joint investment program.

    Predictions that more ECB help will be needed were reinforced Monday by a drop in Germany’s closely-watched Ifo business confidence index. It fell to 106.3 points in August, from 108 in July and below analysts’ expectations for a dip to 107. The downbeat signal from the largest of the 18 economies that use the euro follows drops in other surveys of business activity. The currency union showed zero growth in the second quarter after four quarters of weak recovery from its crisis over government debt.

    The recent data, coupled with turmoil in Ukraine and the Middle East, has shaken confidence in the ECB’s outlook that modest growth will continue. The ECB launched a raft of measures in June, including a cut in its benchmark interest rate to a record low of 0.15 percent and an offer of cheap loans to banks that are willing to lend to businesses. Officials have said they want to wait to see how those steps work.

    But signs are growing that the ECB and its president, Mario Draghi, may not have that luxury.

    “The continued fall of the Ifo is really problematic for the rest of the euro area, which is barely growing,” said Commerzbank’s chief economist, Joerg Kraemer. “The ECB’s optimistic economic outlook is crumbling.”

    Draghi has said that if weak inflation — now only 0.4 percent — shows signs of worsening, the bank could launch large-scale purchases of financial assets, known as quantitative easing, or QE. He said Friday at a conference in Jackson Hole, Wyoming, that inflation expectations have “exhibited significant declines at all horizons.”

    He said the bank would “acknowledge these developments” and use “all the available instruments” to keep prices stable.

    Economist Kraemer said the comments mean that “the probability of broad-based bond purchases (QE) is rising.” The ECB’s governing council next meets Sept. 4.

    Shares rallied on Monday on the prospect of more stimulus, with the benchmark German and French indexes up 1.8 percent and 2.1 percent. The euro fell to $1.3198 from $1.3242 late Friday — QE can send a currency lower. Tellingly, European government bonds rose, driving down their yields, which move opposite to price. Germany’s 10-year bond yielded 0.93 percent; the equivalent bond issued by Ireland, which needed to be bailed out in 2010, yielded 1.81 percent, below even U.S. Treasurys at 2.39 percent.

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