EU figures released yesterday downgraded growth prospects for the euro zone to 0.2 to 0.5 per cent in both the third and fourth quarters, the third downgrade this year.
The European Central Bank (ECB) has defied calls to cut interest rates, insisting that prospects for economic growth in the euro zone remain good in the medium term. Speaking in Frankfurt after a meeting of the ECB governing council, its president, Mr Wim Duisenberg, acknowledged that the immediate economic outlook is uncertain.
"Sources of downside risks - including oil prices, imbalances in the global economy, financial market uncertainties and their impact on consumption, investment and, thus, on employment - will be monitored closely. At this juncture, it is particularly difficult to offer a precise assessment of the timing and strength of the economic upswing, both in the euro area and globally.
Mr Duisenberg said that money supply was adequate and dismissed fears of a credit squeeze following sharp falls in the share price of some European banks.
"The impact on stock prices has been rather dramatic but, generally speaking, the banks and financial institutions can weather the storm very well because of their sound, robust underlying positions," he said.
The decision to leave rates unchanged at 3.25 per cent means that the cost of borrowing in the euro zone has been frozen for a full year, despite a massive slowdown in Europe's economy.
But Mr Duisenberg insisted yesterday that it is the slow pace of structural reform in some EU countries rather than the cost of money that is strangling growth.
"The main problem plaguing our economies, both here and across the Atlantic, is the combination of uncertainties prevailing and confidence lacking. I believe the authorities, both the monetary and fiscal authorities, can contribute towards eliminating the uncertainties and boosting confidence by following a steady line by inspiring confidence through their steady, determined following of the policies, as they should do. I think that it is the best contribution under the current circumstances that the policy-making authorities can make," he said.
The ECB president said that euro-zone governments should stick to plans to balance their budgets, and he called on markets and the public to have realistic expectations of what central banks can do.
"Do not ask for monetary policy to perform tricks it cannot do. And, at the current juncture, what you can and should most expect from a central bank is that it does its utmost to inspire or re-inspire confidence among consumers and investors. We should at least keep our promise - the promise we made in our mandate - to deliver stable prices and that is what we are doing," he said.
