Insufficient change

The long-expected cut in interest rates in the euro zone has at last arrived, although the move fell short of what is needed. The European Central Bank has lowered its key intervention rate by a quarter of a point to 0.5 percent while the rate charged at its emergency lending facility was cut from 1.5 percent to 1.0 percent. The bank also extended for at least another year its extraordinary unlimited liquidity line for banks. However, these decisions were the minimum to be expected in a monetary union in which inflation is under control and unemployment is rising at an alarming rate. The overriding economic climate is one of depression with no hope of a quick recovery. In other words, investors and governments most affected by the recession expected something more than a mere cut in interest rates.

What has yet to appear in the ECB’s manual is a series of measures to facilitate funding for small- and medium-sized enterprises (SMEs). The objection to the bank’s policy is that the liquidity facilities and a relaxation in interest rates are not being passed on to the real economy — that is, companies and households. ECB President Mario Draghi is well aware of this, and on Thursday rightly expressed frustration about the situation. His own calculations show that in addition to suffering drastic credit rationing, Italian and Spanish companies pay three to four percentage points more for funding than German and French firms. This is not exactly a paradigm for monetary union.

The question is whether the ECB has the available resources to unblock this situation, or do we have to put it off with a dysfunctional relaxation of monetary policy that makes life easier for the banks of countries with lower borrowings costs and punishes those of countries with higher risk premiums? As the answer to this is yes, the ECB does have the necessary resources, the question turns to knowing when the bank will make — or the real political conditions in the European Union will allow it to make — its move. While Draghi lowers interest rates by a quarter of a point and announces the creation of a working group to study how to help out SMEs, the US Federal Reserve has maintained its monetary stimulus policies in its bent to achieve sustained growth and lower rates. The Fed will buy whatever amount of debt is required, when it is required.

The difference is absolute. The ECB can do something more to avoid unemployment remaining high and pull the euro zone away from the risks of market fragmentation, improving the currently deficient transmission of monetary policy to the real economy. What is needed to address these anomalies involves establishing channels for direct financing or through banking systems to guarantee the normal flow of financial resources to these companies at a cost that reflects the official rate cuts.

Given the dithering and excessive caution of the ECB, it is not surprising that the financial markets showed disappointment at the rate cut. In the absence of other measures the impact of the cut will be limited. There is little room for applying hot towels or providing stimuli in doses. The ECB should be just as committed to achieving economic recovery as the Federal Reserve and the Bank of Japan. But the European authorities still seem unconvinced about the need to stimulate demand to avoid a decade of depression that puts the political and social stability of the euro zone at risk, and in the ultimate instance the very viability of the bloc itself. The moment has come and the ECB must launch a signal of more rigorous change.