The European Central Bank's decision to reduce interest rates by 50 basis points to 3.25 per cent is a welcome recognition that growth should be boosted now that inflation in the euro zone has been successfully tamed. This is a sea-change in policy by the bank. Up to now it has been concerned to preserve its independence from interfering politicians and stick to its anti-inflation mandate. The overall situation in Europe and throughout the global economy is too serious to allow such turf wars dictate policy. The urgent task now is to find ways to encourage economic recovery and stimulate growth.
Those prospects are made more uncertain by the latest figures from the ECB, national finance ministries and the 30 developed states in the OECD. They make it quite clear how deeply interconnected the global economy has become, so that recessionary trends in the United States and Japan have profound effects in Europe. Thus the OECD is preparing to reduce its expectation of growth to 1.2 per cent for 2002 compared to 4.1 per cent this year. The ECB is reducing its expectation of growth from 2.8 to 1.7 per cent. Similar readjustments are being made at national level throughout the euro zone, in the United Kingdom and the US - just as there is now an effectively common response with declining interest rates.
In Ireland a public disagreement has arisen between the Governor of the Central Bank, Mr Maurice O'Connell, who says growth in the Irish economy is collapsing and the Tβnaiste, Ms Harney, who remains more optimistic that it has bottomed out and can recover rapidly. Both agree on how vulnerable the economy is to international trends. But it is a bad mistake to panic, to talk down the economy unnecessarily or to misjudge the extent to which domestic policy remains autonomous and makes a real difference to economic performance.
Irish economic fundamentals are healthy for the most part, certainly in any comparative perspective. Employment has increased sharply since the mid- 1990s, although redundancies have escalated in recent weeks; unemployment is relatively low, while recruitment continues in several sectors. Many companies continue to expand or at least hold their own. The overall position of the public finances remains sound, so that there are ample opportunities to tackle infrastructural development, social housing, health and educational needs despite the downturn and in such a way as to stimulate economic activity, perhaps with some borrowing. Inflation has moderated. The Government will be judged electorally on how effectively it manages such priorities in coming months.
This cut in interest rates is good news for most businesses and borrowers and sets the scene for an orderly introduction of the euro on January 1st. It has to be matched by a readiness of lending agencies to pass it on to consumers rather than boost their margins. If market competition does not force their hands the Minister for Finance should consider ways to encourage them to do so in the forthcoming Budget. The main risk now, in Ireland and elsewhere in the OECD area, is that low levels of confidence will impede investment and consumer spending, so that these rate reductions do not have the intended effect.