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The ECB's meeting - Waiting for the recovery

Jun 6th 2013, 15:38 by P.W.

THE European Central Bank (ECB) left its monetary stance unchanged today. The

decision came as little surprise just one month after it had lowered its main

policy rate, from 0.75% to 0.5%. That made the press conference after the

governing council s meeting in Frankfurt the main event, but there were no

fireworks.

Mario Draghi, the ECB s president, had set the tone in his opening statement,

which was liberally sprinkled with the word subdued . Inflation was subdued.

So, too, was credit. And when the recovery eventually occurred later this year

its pace would also be subdued.

In keeping with this downbeat assessment, the quarterly staff forecast for

output this year has been revised down again. GDP is expected now to fall by

0.6% in 2013; in March a decline of 0.5% had been predicted (last December the

drop was put at 0.3%). Moreover, the council s assessment was that risks to the

forecast were to the downside, arising from weaker than expected domestic and

global demand.

Mr Draghi drew some comfort from signs of improvement in business surveys even

though he acknowledged this was from low levels. A report on June 5th on

euro-wide output in manufacturing and services compiled by Markit, a research

firm, rose for example from 46.9 in April to 47.7 in May. But since the

dividing line between contraction and expansion is 50, that is still consistent

with the recession, which has already lasted for six quarters, extending a

further three months. And judging by Mr Draghi s remarks, even if output does

rise again in the second half of 2013, the recovery will be a lacklustre

affair.

Will the ECB do more? Mr Draghi mentioned the idea of negative deposit rates

again. He said that the council had discussed this option, which was now

technically feasible, and described it as one of the measures we keep on the

shelf . The remark was no doubt aimed at currency traders since a weaker

exchange rate is one way of stimulating the moribund euro zone.

But bespoke help for small and medium-sized businesses in southern Europe,

however credit-starved they may be, still seems a long way off. One possible

way in which the central bank could help would be by buying securitised loans.

But Mr Draghi said that creating this product for smaller firms was very tricky

and described it as a medium-to-long-term proposition .

Rather like Mr Micawber, the ECB seems to be hoping that something in this case

the recovery will turn up. One impetus is likely to come from external demand

as the euro zone piggy-backs on growth in the rest of the world. But a

sustained recovery requires a pick-up in consumption and investment, and that

will be harder to achieve.

The protracted weakness especially in southern Europe is inflicting social

misery. Unemployment reached 12.2% of the workforce in the euro area in April,

and is around 27% in Greece and Spain and close to 18% in Portugal. Such high

rates of joblessness are politically perilous, too. But what is most corrosive

of all is loss of hope as the lost decade continues.